The Barest Minimum You Need To Know Before Investing In Mutual Funds!
A very basic breakdown of Mutual Funds for the beginner.
You already know that Mutual Funds Sahi Hai. You also know it is a pool of money that is used for investment.
Now, you want to invest in Mutual Funds too. Well, the small hitch is the number of terms to decipher. Growth, dividend, equity, debt, regular, direct, hybrid, sectoral, balance, fund of funds…..all these terms are enough to make the good old Fixed Deposit look attractive. Then there are 4000+ funds to wade through.
So, let us break this down to the very basics. Classification is mostly derived from where the money gets invested. If the money goes into stocks then it is an Equity fund, if it is invested in debt (corporate bonds, govt bonds, loans) then it is a Debt fund. If a MF wants to invest in both, then it is a Hybrid fund.
Based on your risk appetite you chose where to invest. Equity is typically higher risk and higher return, debt is lower risk and lower return. Of course, that is theory, the last decade has turned this on its head in Indian markets, but we will not digress for now.
Once you decide where to invest – equity and debt, then we can move on to other parts of the classification.
Let us say, you want to invest in equity mutual funds, you have heard that there is tax to be saved by investing in ELSS (Equity Linked Saving Schemes).
Within Equity, there are many options. The main classification – growth and dividend. If you invest the dividends back into the same fund, it is termed a Growth fund, and if you want dividends in your pocket, then it is a Dividend fund. Where do these dividends come from – they are the dividends given out by companies in which the Mutual Fund invests.
Why does it matter? Because of two colossal forces Tax and Compounding. If you take the dividend out then it gets taxed. If you leave it in then it can compound. We will leave it there for now. Tax and compounding are much larger topics demanding many posts of their own.
Finally, there is one more important uber classification you need to know. 
Regular and Direct. Regular funds are the funds where the agent/agency makes a commission for selling the fund to you. Direct funds are the ones where you invest directly and there is no commission given out to anyone. The irksome part is that the commission is paid out irrespective of whether the fund made any profit for you.
Let’s look at an example to understand this: Axis Bluechip, a fund returning 12.8% since inception. The Direct plan charges an expense of 0.5% whereas the Regular plan charges a commission of 1.70%. The additional 1.2% is mostly the expense incurred for the agency selling the fund. (disclaimer: this can change, the numbers are true as of 1st May 2021)
So, consider a SIP of 50K per month in this fund. At the end of 10 years: 1. The Regular fund will be worth – 1.13 Cr. 2. The Direct fund would be worth 1.20 Cr. The difference of ~7 lacs is the impact of the additional commission on the Regular fund.
If you want to take control of your personal finances then there is no shortcut but to understand details about mutual funds. Know your own risk appetite (will you have sleepless nights if your fund drops in value) and pick the area you want to invest in – ex. debt or equity, blue-chip companies or small cap etc.
There are enough people out there who will be happy to take disproportionate commission from you and ‘help’ you invest. You need to be aware and educating yourself is the only way to do it.
Here is a list of sites that I have found useful, you might also benefit by spending time on these. You can dive deeper into all the terminology and also evaluate & compare funds. Happy Learning!
www.morningstar.in
www.moneycontrol.com
www.valueresearchonline.com
www.mutualfundssahihai.com
www.sebi.gov.in
You can also read the very basics here and find out how it started
