Mutual Funds – What are Mutual funds & Top 10 Mutual fund to Invest

What are Mutual Funds?

Mutual funds are one of the most popular investment options these days. A mutual fund is an investment vehicle formed when an asset management company (AMC) or fund house pools investments from several individuals and institutional investors with common investment objectives. A fund manager, who is a finance professional, manages the pooled investment. He or she purchases securities such as stocks and bonds that are in line with the investment mandate.

Mutual funds are an excellent investment option for individual investors to get exposure to expert managed portfolios. Also, one can diversify their portfolio by investing in mutual funds as the asset allocation would cover several instruments. Investors would be allocated with fund units based on the amount they spend. Each investor would hence experience profits or losses that are proportional to their investment. The main intention of the fund manager is to provide optimum returns to investors by investing in securities that are in sync with the fund’s objectives. The performance of mutual funds is dependent on the underlying assets.

Top Mutual Funds

The table below shows the Best Equity Funds:

Fund Name 3-Year Returns 5-Year Returns Link
ICICI Prudential Technology Fund 26.04% 14.89% Invest Now!
SBI Technology Opportunities Fund 22.50% 12.09% Invest Now!
Nippon India Pharma Fund 20.75% 7.88% Invest Now!
Edelweiss Greater China Equity Growth 19.88% 19.34% Invest Now!
Kotak Gold Fund 18.57% 13.10% Invest Now!

The table below shows the Best Debt Funds:

Fund Name 3-Year Returns 5-Year Returns Link
ICICI Prudential Constant Maturity Gilt Growth 10.55% 10.33% Invest Now!
SBI Magnum Constant Maturity Fund Regular Growth 10.45% 10.28% Invest Now!
Edelweiss Banking and PSU Debt Fund Regular Growth 9.70% 8.80% Invest Now!
DSP Government Securities Fund – Regular Plan – Growth 9.25% 8.30% Invest Now!
L&T Triple Ace Bond Fund Growth 9.25% 8.19% Invest Now!

The table below shows the Best Hybrid Funds:

Fund Name 3-Year Returns 5-Year Returns Link
Kotak Asset Allocator Fund 9.23% 9.92% Invest Now!
SBI Magnum Medium Duration Fund 8.89% 9.63% Invest Now!
Mirae Asset Hybrid-Equity Fund 5.95% 9.53% Invest Now!
Canara Robeco Equity Hybrid Fund 7.75% 9.40% Invest Now!
ICICI Prudential Advisor Series – Conservative Fund 6.97% 9.08% Invest Now!

Mutual Funds:Detailed Breaking Down

Mutual funds, unlike stocks, do not invest only in a particular share. Instead, a mutual fund plan would invest across several investment options to provide investors with the best possible returns. Also, investors are not required to pick the stocks as the fund manager does the research and picks the best-performing instruments that have the potential to offer high returns.

The mutual fund investors are allocated with fund units proportional to the amount they have invested. The returns that an investor would get will depend on the number of fund units held by them. Each fund unit has exposure to all the securities that the fund manager has chosen to include in the portfolio. Holding fund units does not provide investors with the voting rights of any company.

By investing in mutual funds, the investors need not worry about the concentration risk as the fund manager invests across several instruments. Therefore, investing in mutual funds is an excellent way of diversifying your investment portfolio. The price of the fund unit of a mutual fund is referred to as the net asset value (NAV). It is the price at which one can buy or sell their fund units of a mutual fund plan. The NAV of a mutual fund is calculated by dividing the total worth of assets in the portfolio, minus liabilities. All mutual fund units are sold and bought at the prevailing NAV of the mutual fund. This is how mutual funds work.

Types of Mutual Funds

Mutual funds in India are broadly classified into equity funds, debt fund, and balanced mutual funds, depending on their asset allocation. The risk assumed and returns provided by a mutual fund plan would depend on its type. We have broken down the types of mutual funds in detail below:

  1. Equity Funds

    Equity funds, as the name suggests, invest mostly in equity shares of companies across all market capitalisations. A mutual fund is categorised under equity fund if it invests at least 65% of its portfolio in equity instruments. Equity funds have the potential to offer the highest returns among all classes of mutual funds. The returns provided by equity funds depend on the market movements, which are influenced by several geopolitical and economic factors. The equity funds are further classified as below:

    1. Small-Cap Funds

      Small-cap funds are those equity funds that invest in shares of companies with small market capitalisation. SEBI defines small-cap companies as those that are ranked after 251 in market capitalisation.

    2. Mid-Cap Funds

      Mid-cap funds are those equity funds that invest primarily in equity and equity-linked instruments of companies with medium market capitalisation. SEBI defines mid-cap companies as those that are ranked between 101 and 250 in market capitalisation.

    3. Large-Cap Funds

      Large-cap funds funds are those equity funds that invest mostly in equity and equity-linked instruments of companies with large market capitalisation. SEBI defines large-cap companies as those that are ranked between 1 and 100 in market capitalisation.

    4. Multi-Cap Funds

      Multi-Cap Funds Funds invest substantially in equity and equity-linked instruments of companies across all market capitalisations. The fund manager would change the asset allocation depending on the market condition to reap the maximum returns for investors and reduce the risk levels.

    5. Sector or Thematic Funds

      Sectoral funds invest principally in equity and equity-linked instruments of companies in a particular sector like FMCG and IT. Thematic funds invest in equities of companies that operate with a similar theme like travel.

    6. Index Funds

      Index Funds are a type of equity funds having the intention of tracking and emulating the performance of a popular stock market index such as the S&P BSE Sensex and NSE Nifty50. The asset allocation of an index fund would be the same as that of its underlying index. Therefore, the returns offered by index mutual funds would be similar to that of its underlying index.

    7. ELSS

      Equity-linked savings scheme (ELSS) is the only kind of mutual funds covered under Section 80C of the Income Tax Act, 1961. Investors can claim tax deductions of up to Rs 1,50,000 a year by investing in ELSS.

  2. Debt Mutual Funds

    Debt mutual funds invest mostly in debt, money market and other fixed-income instruments such as treasury bills, government bonds, certificates of deposit, and other high-rated securities. A mutual fund is considered a debt fund if it invests a minimum of 65% of its portfolio in debt securities. Debt funds are ideal for risk-averse investors as the performance of debt funds is not influenced much by the market fluctuations. Therefore, the returns provided by debt funds are very much predictable. The debt funds are further classified as below:

    1. Dynamic Bond Funds

      Dynamic Bond Funds Dynamic Bond Funds are those debt funds whose portfolio is modified depending on the fluctuations in the interest rates.

    2. Income Funds

      Income Funds Income Funds invest in securities that come with a long maturity period and therefore, provide stable returns over time. The average maturity period of these funds is five years.

    3. Short-Term and Ultra Short-Term Debt Funds

      Short-term and ultra short-term debt funds are those debt funds that invest in securities that mature in one to three years. These funds are ideal for risk-averse investors.

    4. Liquid Funds

      Liquid funds are debt funds that invest in assets and securities that mature within ninety-one days. Liquid funds are a great option to park surplus funds, and they offer higher returns than a regular savings account.

    5. Gilt Funds

      Gilt Funds are debt funds that invest in high-rated government securities. It is for this reason that these funds carry extremely low risk and are apt for risk-averse investors.

    6. Credit Opportunities Funds

      Credit Opportunities Funds mostly invest in low rated securities that have the potential to provide higher returns. It is for this reason that these funds are the riskiest class of debt funds.

    7. Fixed Maturity Plans

      Fixed maturity plans (FMPs) are close-ended debt funds that invest in fixed income securities such as government bonds. You may invest in FMPs only during the fund offer period, and the investment will be locked-in for a predefined period.

  3. Balanced or Hybrid Mutual Funds

    Balanced or hybrid funds invest across both equity and debt instruments. The main objective of hybrid funds is to balance the risk-reward ratio by diversifying the portfolio. The fund manager would modify the asset allocation of the fund depending on the market condition, to benefit the investors. Investing in hybrid funds is an excellent way to diversify your portfolio as you would gain exposure to both equity and debt instruments. The debt funds are further classified as below:

    1. Equity-Oriented Hybrid Funds

      Equity-oriented hybrid funds invest at least 65% of its portfolio in equities while the rest is spent on money market or debt instruments.

    2. Debt-Oriented Hybrid Funds

      Debt-oriented hybrid funds allocate at least 65% of its portfolio in purchasing debt instruments such as treasury bills and government securities, and the rest is invested in equities.

    3. Monthly Income Plans

      Monthly income plans (MIPs) mostly invest in debt instruments and aim at providing a steady return over time. The exposure to equities is generally restricted to 20%. Investors can decide if they like to receive dividends on a monthly, quarterly, or annual basis.

    4. Arbitrage Funds

      Arbitrage funds aim at maximising the returns by purchasing securities in one market at lower prices and selling them in another market at a premium. However, if the opportunities for arbitrage are not available, the fund manager may choose to invest in debt securities or cash.

Why Should You Invest in Mutual Funds?

Investing in mutual funds provides several advantages for investors. The flexibility and expert management of money make mutual funds a lucrative investment option.

  1. Investment Handled by Experts
    Fund managers manage the investments pooled by the asset management companies (AMCs) or fund houses. They are finance professionals with an excellent track record of managing investment portfolios. Furthermore, fund managers are supported by a team of analysts and experts who pick the best-performing stocks and assets that have the potential to provide excellent returns for investors.
  2. No Lock-in Period
    Most mutual funds come with no lock-in period. In investments, the lock-in period is a timeframe over which the investments once made cannot be withdrawn. Some investments allow premature withdrawals within the lock-in period in exchange for a penalty. Most mutual funds are open-ended, and they come with no exit load. ELSS is the most popular mutual funds plan which has a lock-in period of three years.
  3. Low Cost
    Investing in mutual funds comes at a low cost, and thereby making it suitable for small investors. Fund houses or asset management companies (AMCs) levy a small amount referred to as the expense ratio on investors to manage their investments. It generally ranges between 0.5% to 1.5% of the total amount invested. The Securities and Exchange Board of India (SEB) has mandated expense ratio to be under 2.5%.
  4. Systematic Investment Plan
    The most significant advantage of investing in mutual funds is that you can spend a small amount regularly via a systematic investment plan (SIP). The frequency of your SIP can be monthly, quarterly, or bi-annually, as per your comfort. Also, you can decide the ticket size of your SIP. However, it cannot be less than the minimum investible amount. You can initiate or terminate a SIP as and when you need.
  5. Switch Fund Option
    If you would like to move your investments to a different fund of the same fund house, then you have an option to switch your investments to that fund from your existing fund. A good investor knows when to enter and exit a particular fund. In case you see another fund having the potential to outperform the market or your investment objective changes and is in line with that of the new fund, then you can initiate the switch option.
  6. Goal-Based Funds
    Individuals invest their hard-earned money with the view of meeting financial goals. Mutual funds provide fund plans that help investors meet all their financial goals, be it short-term or long-term. There are mutual fund schemes that suit every individual’s risk profile, investment horizon, and style of investments. Therefore, investors need to assess their profile carefully so that they pick the most suitable fund plan.
  7. Diversification
    Unlike stocks, mutual funds invest in various assets and shares of several companies, thereby providing the benefit of diversification. Also, this alleviates the risk of concentration. If one asset class fails to perform up to the expectations, then the other asset classes would make up for the losses. Therefore, investors need not worry about market volatility as the diversified portfolio would provide some stability.
  8. Flexibility
    Mutual funds are buzzing these days because they provide the much-needed flexibility to the investors. The combination of investing via a SIP and no lock-in period has made mutual funds an even more lucrative investment option. Also, you can enter and exit a mutual fund plan at any time, which may not be the case with most other investment options. It is for this reason that millennials are preferring mutual funds.
  9. Liquidity
    As most mutual funds do not have a lock-in period, it provides investors with high liquidity. This makes it easier for the investor to fall back on their mutual fund investment at times of financial crisis. The redemption requests are processed quickly, unlike other investment options. On placing the redemption request, the fund house or the asset management company would credit your money in just 3-7 days.
  10. Seamless Process
    Investing in mutual funds is a relatively simple process. Buying, selling of the fund units are all made at the current net asset value (NAV) of the mutual fund plan. As the fund manager and his or her team of experts and analysts are tasked with choosing shares and assets, investors only need to invest, and the rest would be taken care of by the fund manager.
  11. Regulated
    All mutual fund houses and mutual fund plans are always under the purview of the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI). Apart from that, the Association of Mutual Funds in India (AMFI), a self-regulatory body formed by all fund houses in the country, also governs fund plans. Therefore, investors need not worry about the safety of their mutual fund investments as they are safe.
  12. Ease of Tracking
    One of the most significant advantages of investing in mutual funds is that tracking investments are easy and straightforward. Fund houses understand that it is hard for investors to take some time out of their busy schedules to track their finances, and hence, they provide regular statements of their investments. This makes it a lot easier for them to track their investments and make decisions accordingly.

Who Should Invest in Mutual Funds?

Everyone who has a particular financial goal, short-term or long-term, needs to invest in mutual funds. Investing in mutual funds is an excellent way to accomplish your goals faster. There are mutual fund plans that suit all personas. Investors need to assess their risk profile, investment horizon, and goals before getting started with their mutual fund investment. For example, if you are risk-averse and planning to purchase a car in five years, then you may consider investing in gilt funds. If you are ready to take some risk and are planning to buy a house in a period of fifteen to twenty years, then you may consider investing in equity funds. If your investment horizon is less than two years and is looking to earn higher returns than a regular savings bank account, then you may consider investing in liquid funds.

How to Invest in Mutual Funds?

Investing in mutual funds is a simple process. The in-house experts at ClearTax have handpicked the best performing funds that suit your needs and goals. We have researched the top fund houses in the country and offer only the best performing funds on our platform. You can invest in mutual funds through ClearTax by following the steps mentioned below:

  1. Log onto
  2. Signup for an account
  3. Complete your KYC process if you have not already done so. With ClearTax, you can verify your KYC within five minutes.
  4. Choose the most suitable fund among our handpicked mutual fund plans.
  5. Duly fill the online application form by providing all the details.
  6. Choose the preferred mode of investment (lumpsum or SIP)
  7. If you choose SIP, then select the frequency and ticket size of your SIP.
  8. Link your bank account and transfer the amount.
  9. You will receive the details of your investment, such as folio number through an email or SMS.
Start investing now

When Should You Invest in Mutual Funds?

Unlike stocks, you need not wait for any particular time to invest in mutual funds. This is because the fund managers and his team of analysts pick the right securities and assets at all times and is going to benefit the investors, regardless of the market condition.

Also, if you are investing via a SIP, then you are going to benefit from both down and high market cycles. When the markets are down, you end up buying more fund units as the stock prices would have fallen to their fresh lows, and when the markets shoot up, you buy lesser units. This is called the rupee cost averaging. This benefit is available only in the case of investing in mutual funds via SIP. Hence, you need not wait for any particular time to invest in mutual funds. The best time to invest in mutual funds is now!

Related Calculator

SIP Calculator

A SIP calculator is a simulation, which allows individuals to estimate the return on their mutual fund investments made through SIP. Investing through SIPs in mutual funds has become one of the most popular investment options for millennials these days.

SIP Calculator

Mutual Fund Calculator

The Mutual Fund Calculator will give you the investment value at maturity by calculating fund returns according to your investment horizon. You can adjust the variables of the calculator like SIP/lump sum, amount of investment, frequency of SIP, expected rate of return and duration of SIP.

Mutual fund Calculator

FAQs (Frequently Asked Questions)

  • How to choose a suitable mutual fund?
    A right fund plan cannot be chosen only by considering the past performance of the fund and fund manager. To choose the right mutual fund, you need to check if the fund’s investment objective is in line with your goals.
  • How can you redeem your mutual fund units?
    You can redeem MF units anytime. You need to inform your fund house or the agent. Your money will be deposited to your bank account within 3- 7 working days, post-redemption.
  • What is the time period considered for the purpose of income tax?
    Income Tax is levied on the annual income of taxpayers. It is levied based on the income you earn in each financial year (1 April of this year till 31 March of the next year) and not the calendar year. The previous year is a period for which a person has to pay tax. Assessment year is a 12 month period following the previous year, during which a taxpayer files his/her ITR.
  • What is CRISIL MF ranking?
    CRISIL is an analytical company, which provides rankings, research, and advisory services. MF rankings given by CRISIL depend on global parameters. The rankings are very crucial for investors when they are deciding on a particular scheme.
  • Is SIP better than a lump sum?
    It depends on the individuals and the market scenario. If you are risk-averse, then investing in via SIP is advisable. If the markets have fallen record levels, then a lump sum is advisable. Again, you need to assess your risk profile and requirements.
  • Do mutual funds invest only in stocks?
    No, mutual funds don’t invest only in stocks. Only equity funds invest in stocks, while debt funds and liquid funds hardly invest in stocks. In fact, there are some debt funds that don’t invest in stocks at all.
  • What is an exit load?
    It is the penalty charged by the fund house if you are not able to stay invested over a particular time frame. Most mutual funds are open-ended and come with no exit load. Investors should read the fund offer carefully before investing.
  • What is an expense ratio
    The expense ratio is the fee charged by the fund houses to manage the investments of the investors. It is always less than 2.5% of the amount invested by the investors.
  • Are mutual funds safe?
    Yes, mutual fund investments are absolutely safe as all fund plans and fund houses are under the hawk eye of the Securities and Exchange Board of India (SEBI), the Association of Mutual Funds in India (AMFI) and the Reserve Bank of India (RBI).
  • Who can invest in mutual funds?
    All individuals who have completed their KYC process are eligible to invest in mutual funds. However, some fund houses don’t accept investments from NRIs living in the United States and Canada due to the FACTA regulations.