When first launched in 1963, mutual funds were regarded as a niche investment product that common investors were not confident about. Today, investors prefer to invest in mutual funds as their easy investment tool. What changed? Financial awareness, enhanced product scope, strong regulations, and many other improvements. According to AMFI, India’s mutual fund story is just beginning, and it envisions taking the mutual fund AUM to 50% of India’s GDP.
While inflows are steadily increasing, it is vital to highlight the key features of mutual funds to investors who are stepping into their mutual fund journey. Let’s brush up on your mutual funds knowledge base by underscoring their key features in this blog.
Core Features of Mutual Funds
Mutual funds come with several distinctive features, and this section takes you through all of them.
- Professional Management
Mutual funds benefit from adeptly-managed, experienced and specialised fund managers who know what they are doing. These fund managers are like the celebrity figure that lures more investors into the fund. They effectively leverage their expertise and knowledge to apply investment strategies that align with the fund’s goals. These fund managers divulge in proper research and deploy risk management techniques to generate optimal returns. Active funds that aim to beat the benchmark require substantial investment expertise, and that’s where fund managers play a key role. Some top fund managers of a few mutual funds are:
| Fund managers | Funds managed |
| Mr. Shreyas Devalkar | Axis large-cap fund, Axis Midcap fund, and more. |
| Mr. Harsha Upadhyaya | Kotak Flexi Cap Fund, Kotak Large and Midcap Fund, and more. |
| Mr. Manish Gunwani | Bandhan Large Cap Fund, Bandhan Flexi-cap Fund, and more. |
- Diversification & Risk Mitigation
Mutual fund investments are inherently spread across different asset classes, including equity, debt, bonds, and others. In fact, they are also diversified across sectors, geographies, and market capitalisation of stocks. This reduces the risk associated with single-asset concentration, geographic concentration, and sectoral bias. They spread exposure in a way that a single asset/stock’s poor performance may not significantly impact the entire portfolio.
- Liquidity & Easy Redemption
Mutual fund liquidity is high, and allows for easy redemption when required. Redemptions are processed at the Net Asset Value (NAV) of the closing day. You can choose to redeem your investment either fully or partially, depending on your financial needs. Additionally, the redemption process is straightforward, as it can be done online in quick and easy ways. Once the redemption process is completed, money is transferred back to your account within 1-3 business days.
- Affordability & Low Minimum Investment
Mutual funds provide affordable investment options for small and beginner investors. Many schemes allow you to start with a Systematic Investment Plan (SIP) of just ₹100 per month. If you are beginning your mutual fund journey and prefer small-scale investments, SIPs are an excellent choice. Your mutual fund journey can begin with ₹100, ₹250, or ₹500 monthly SIPs. Even with small amounts, your portfolio benefits from diversification across various assets, helping you build wealth gradually.
- Flexibility (SIP, SWP, STP, Lump-sum Options)
Mutual funds are highly flexible tools that offer investors a selection of investment options, such as SIP, SWP, STP, and lump sum.
- SIP: Systematic Investment Plans (SIPs) allow you to invest a fixed amount of money into a mutual fund scheme at fixed intervals. This mode of investing promotes discipline and is ideal for long-term wealth-building. This SIP flexibility allows you to achieve your future financial goals by taking small steps.
- SWP: Systematic Withdrawal Plan (SWP) works contrary to SIP. Through this mode, you can withdraw a decided amount of money from a mutual fund scheme in fixed intervals. For this mode, you need to invest a lump sum amount and choose the interval for withdrawal- monthly, quarterly, or yearly.
- STP: Systematic Transfer Plan (STP) allows you to systematically switch from one mutual fund scheme to another in fixed intervals. This allows you to invest in a variety of investments over time.
- Lump sum: A lump sum investment is a simple, one-off investment made in a mutual fund scheme. This amount is spent on the scheme in one go, instead of spreading it over time.
- Fund Variety & Customisation Options
Mutual funds are categorised as equity funds, debt, and hybrid funds. Each category is further segregated into its own sub-categories of various types. Here’s a concise list of the different types of mutual funds below:
| Type | Sub-Categories |
| Equity | Large Cap Fund, Mid Cap Fund, Small Cap Fund, Multi Cap Fund, Flexi Cap Fund, Sectoral/Thematic Fund, ELSS (Tax Saver), Dividend Yield Fund, Value/Contra Fund, Focused Fund, Large & Mid Cap Fund |
| Debt | Liquid Fund, Money Market Fund, Dynamic Bond Fund, Short Duration Fund, Medium Duration Fund, Long Duration Fund, Fixed Maturity Plan, Gilt Fund, Credit Risk Fund, Corporate Bond Fund, Banking & PSU Fund, Floater Fund |
| Hybrid | Conservative Hybrid Fund, Aggressive Hybrid Fund, Balanced Advantage Fund (Dynamic Asset Allocation), Arbitrage Fund, Equity Savings Fund, Multi-Asset Allocation Fund, Monthly Income Plan |
This array of mutual funds allows you to choose a category and a sub-category that matches your investment ideologies.
- Transparency & Strong Regulation
Mutual funds are governed by strong regulations, thereby promoting transparency for investors. Mutual funds fall under the regulations of Securities and Exchange Board of India (SEBI). SEBI has laid down strict guidelines and protocols to be followed by mutual fund houses while managing their schemes. SEBI decides on the approval, registration, and disclosure requirements of each scheme. At all points, SEBI ensures that investors’ interest is protected.
Mutual funds are required to present their investment mandate, strategy, and guidelines for approval. These are published for investors on the mutual fund website. This ensures all investors are aware of the mutual fund investment process.
- Tax Efficiency & Exemptions (ELSS, LTCG, wealth tax)
Investors often use some categories of mutual funds for their tax efficiency. Under the old regime, Equity-Linked Saving Schemes (ELSS) offer a tax rebate of ₹1,50,000 under section 80C of the Income Tax Act, 1941. However, this benefit does not apply to investors following the new tax regime.
Now, let’s consider the tax structure of different funds applicable after April 1, 2023:
| Type of fund | Holding period for LTCG | STCG tax rate | LTCG tax rate |
| Equity funds | > 12 months | 20% | 12.5% |
| Debt funds | All are considered short-term | Slab rate | Slab rate |
| Hybrid funds | >12 months for equity-oriented funds All considered short-term for debt-oriented funds | 20% (if equity-oriented) Slab rate (if debt-oriented) | 12.5% (if equity-oriented) Slab rate (if debt-oriented) |
Wealth tax was previously applicable to an individual’s net worth exceeding a certain threshold. However, now it’s no longer applicable. Earlier, mutual funds were also a part of the net worth.
- Ease & Convenience of Investing
Mutual funds are convenient tools for investing for common investors. Investors can easily purchase or redeem mutual fund units online through the mutual fund website or official broker platforms. The process of application and redemption is both simple and easy to follow. You can also stay updated on your mutual funds’ performance in real-time.
Lesser-Known but Valuable Features
Some of the lesser-known, yet valuable features of mutual funds include:
SWP, STP, Wealth-Tax Exemption
Features like SWP and STP are not as popular as SIP and lump-sum investment modes. However, despite their low-key appearance, these features can be useful for investors. Investors who prefer a regular stream of income, such as retirees, pensioners, etc, may prefer SWP options. STPs are convenient for conservative investors who are willing to transfer funds from low-risk instruments to high-risk investments according to market conditions. The wealth-tax exemption also removes a tax layer from mutual fund investors.
Regular Fact Sheets & Transparency
Mutual fund houses release monthly fact sheets that provide a detailed summary of the fund’s investments and performance. This provides investors with transparency in the fund’s investment process.
How These Features Address Investor Concerns
With these elaborate features, mutual funds can address the following investor concerns:
- Optimised returns: Through a specialised fund manager and investment process, investors can expect optimised returns from their mutual fund schemes.
- Reduced risk exposure: Diversification helps investors reduce the risk associated with their mutual fund investment.
- Enhanced returns: With tax savings and funds like ELSS funds, investors can get enhanced returns.
- Trust: Through transparent and regularly disclosed investment strategies, mutual funds successfully establish trust in investors.
Comparison: Mutual Funds vs Other Investment Vehicles
Here’s how mutual funds fare against other investment vehicles like fixed deposits and equity.
| Parameter | Mutual Funds | Fixed Deposits (FDs) | Stocks (Equity Shares) |
| Nature of Investment | Combined investment from various investors is invested into a variety of assets. | Fixed investment made to achieve a guaranteed return. | Investing directly in the ownership of a company. |
| Risk Level | Moderate to High | Negligible | High |
| Returns | Market-linked; generally higher than FDs over the long term. | Fixed; usually between 6–8% p.a. | Depends on the market fluctuations. |
| Liquidity | High | Moderate; early withdrawals can levy charges. | High; can buy/sell on trading days. |
| Management | Managed by professional fund managers. | No active management required. | Self-managed or through a broker. |
| Diversification | High | None | Low to Medium |
| Investment Amount | SIPs start as low as ₹100/month; flexible. | Fixed lump sum deposit. | No minimum, but it depends on the stock price. |
Conclusion
Mutual funds are popular investment tools that have plenty of features. Features like professional management, diversification, affordability, and liquidity, among others, make them a preferred tool for investors. Investing in mutual funds is gaining popularity among Indian investors. The key features of mutual funds ensure stability, growth potential, and convenience for investors, thereby protecting investors’ interests.
FAQs
The key features of mutual funds include professional fund management, diversification, liquidity, flexibility, tax efficiency, transparency, ease of convenience, affordability, and a variety of investment options.
Mutual funds benefit from the guidance of professional fund managers who have prior experience, understanding and professional knowledge of managing investments. These fund managers conduct extensive research and analysis before investing in assets. Their strong knowledge base helps them achieve optimal returns for their mutual funds. This, in turn, generates optimal returns for the investor’s portfolio.
Mutual fund investments are highly flexible and easily accessible. You can redeem your mutual fund units either partially or fully through the mutual fund house’s website, broker platforms, or even offline. The redemption process is simple, quick, and convenient, making it easy for investors to access their funds whenever needed.
Certain mutual funds, specifically ELSS funds, are tax-efficient investment options. Investors who follow the old tax regime benefit from up to ₹1,50,000 of tax rebate under Section 80C of the Income Tax Act, 1941. In fact, equity-oriented mutual funds follow a similar capital gain tax structure to equity.
Categories of debt mutual funds are considered highly liquid. Liquid funds, in particular, are highly liquid as they primarily invest in short-term liquid assets that can be redeemed easily. In fact, liquid funds are also regarded as suitable to park funds for emergency purposes. Besides liquid funds, other funds, including ultra-short duration funds and money market funds, are also considered highly liquid.
Mutual funds are governed by SEBI, which ensures the funds abide by all necessary regulations and rules that work in investors’ best interests. Mutual fund schemes must disclose their investment strategy, mandate, and guidelines to ensure transparency. In fact, mutual funds also update their fact sheets monthly to ensure investors remain updated with their monthly insights and performance updates.
Mutual fund features like SWP- Systematic Withdrawal Plan and STP- Systematic Transfer Plan are not as popular as SIPs. SWP allows investors to withdraw a fixed amount of money every month from the given mutual fund scheme. STP lets investors systematically transfer money from one mutual fund scheme to another.
