What are Mutual Funds and How do they work?

Mutual Funds are an easy way to invest your money without the hassle of picking individual stocks or bonds. Here’s how they work: a bunch of people (investors) pool their money together. Then, a professional fund manager uses that money to buy different investments like stocks, bonds, or other securities.

Each person owns a part of the fund, depending on how much they invested. It’s a great way to get started in investing, especially if you don’t have a lot of money or time to do your own research.

Why Choose Mutual Funds?

Mutual Funds are popular because they make investing simple and accessible. Some key benefits include:

Diversification: Your money is spread across various assets, which helps reduce risk.
Professional Management: Experts handle your investments.
Affordable: You can start with a small amount of money.
Liquidity: Easy to buy or sell your investment anytime.
SIP Option: You can invest a fixed amount regularly (monthly/quarterly), making it easy to grow wealth.
Tax Benefits: Some funds, like ELSS, offer tax deductions under Section 80C.
Transparency: You’ll receive regular updates on how your investment is doing.
No Lock-in Period: Most funds let you take out your money whenever you need it.

How Do Mutual Funds Work?

Mutual Funds collect money from investors and invest it in a mix of assets based on the fund’s goal. A fund manager oversees this process, aiming to earn good returns.

There are two main types of Mutual Funds:

Actively Managed Funds: The fund manager picks and chooses investments carefully.
Passively Managed Funds (Index Funds): These simply follow a market index like Nifty 50 or Sensex, requiring less management and having lower fees.

Types of Mutual Funds

Equity Funds: Invest in stocks, ideal for long-term growth but can be risky.
Debt Funds: Focus on fixed-income assets like bonds, offering stable returns with lower risk.
Money Market Funds: Invest in short-term debt instruments—safe with modest returns.
Hybrid Funds: A mix of stocks and bonds for balanced risk and return.
Growth Funds: Aim for high returns by investing in fast-growing companies.
Income Funds: Offer regular income from interest-earning assets.
Liquid Funds: Invest in very short-term assets—great for parking money temporarily.
Tax-Saving Funds (ELSS): Invest mainly in equities and offer tax benefits.
Aggressive Growth Funds: Invest in high-risk, high-reward options like small-cap stocks.
Capital Protection Funds: Focus on protecting your initial investment with modest returns.
Fixed Maturity Funds: Invest in debt instruments with a set maturity period.
Pension Funds: Designed for retirement savings with long-term growth.

How to Invest in Mutual Funds

1. Lump Sum Investment

Invest a large amount all at once. This is ideal when you have extra funds and believe the market is in your favor. But keep in mind—it comes with market risk.

2. Systematic Investment Plan (SIP)

Invest small amounts regularly—monthly or quarterly. SIPs are great for beginners because they reduce the impact of market ups and downs and help build wealth gradually.

How Are Returns Calculated?

There are two common ways to calculate Mutual Fund returns:

For Lump Sum Investments:

Formula:
Future Value = Present Value x (1 + r/100)^n
Where:

r = expected return rate
n = investment duration (in years)

For SIP Investments:

Formula:
FV = P × [(1 + i)^n – 1] × (1 + i) / i
Where:

P = monthly SIP amount
i = monthly interest rate
n = total number of months

To make it easy, use a Mutual Fund calculator to check your expected returns.

Charges & Fees in Mutual Funds

Here are some common charges:

Expense Ratio: Annual fee for managing the fund.
Entry Load: One-time fee while buying units (mostly waived off now).
Exit Load: Fee charged if you sell your investment before a set period.
Transaction Charges: Applied for investments over ₹10,000 in some cases.
Fund Management Fee: Paid to fund managers from the total assets managed.

Common Mutual Fund Terms Explained

NAV (Net Asset Value): The value of each unit in the fund.
AUM (Assets Under Management): Total market value of the fund.
Portfolio: The group of assets held by a fund.
Fiscal Year: The financial year used for accounting.
Load: Fees charged when buying or selling units.
Diversification: Reduces risk by spreading investments.
Redemption: Selling your Mutual Fund units.
Benchmark: A standard used to compare fund performance.
Capital Gain Distributions: Profits shared from the sale of fund assets.
Dividend Reinvestment: Using your dividend to buy more fund units.
Total Return: Overall gain including NAV changes, dividends, and capital gains.
Risk Tolerance: How much risk you’re comfortable with.

Investing Using ICICI Bank’s iMobile App

Here’s how you can manage your investments using ICICI Bank’s app:

Downloading the CAGR Statement

Log in to the iMobile App.
Go to ‘Invest’ → ‘Mutual Funds’ → ‘CAGR Statement’.
Enter details and download.

Adding a Nominee

Go to ‘Invest’ → ‘Mutual Funds’ → ‘Service Request’.
Select ‘Update Nominee Details’.
Fill in the details and confirm via OTP.

Updating Email Address

Go to ‘Mutual Funds’ under ‘Invest’.
Click on ‘Change/Update Email Address’.
Enter new email and confirm with OTP.

Also Read: What are the Top-Performing Consumer Goods Stocks?

How to Invest Online

1. Net Banking

Log in to your bank’s website.
Go to “Investments & Insurance” → “Buy Mutual Funds”.
Choose your plan, enter the amount, and invest.

2. ICICI iMobile App

Log in to the app.
Tap on “Invest and Insure” → “Mutual Funds”.
Choose a fund and start investing in just a few taps.

Main Goals of Mutual Funds

Diversification: Lower your risk by spreading your money across different assets.
Capital Protection: Choose safer funds that focus on preserving your money.
Capital Growth: Go for equity funds if you want to grow your wealth over time.
Tax Saving: ELSS funds offer tax benefits along with potential returns.