Choose the right Mutual Fund for your portfolio.
If you want to invest money and are new to the investment world. You have heard of the term mutual fund. So now let’s understand what exactly a mutual fund is and how it works.
What is a Mutual fund?
If you want to invest money and are new to the investment world,. You have heard of the term mutual fund. So now let’s understand what exactly a mutual fund is and how it works.
Suppose you went to the market to buy bananas, and you only want three bananas, but the shopkeeper is selling only a dozen. 1 dozen (12) bananas cost ₹120. Now you can’t buy the 1 dozen, and you find out that more people in the shop don’t want to buy the whole dozen, so you all gather ₹120 and buy the 1 dozen, and then divide among yourselves. The same thing happens in the mutual fund too.
So now you are grouped with three people there, and each of you contributes ₹30 and then receives 3 bananas each. That is the same way mutual funds divide units among the people.
A mutual fund is like a big basket where many people put their money together. This money is then managed by experts who invest it in different things, like stocks and bonds, to try and make it grow.
So hopefully now it’s clear that you are putting the money in the common pool where you buy the few units. And that common pool is going to be managed by an expert fund manager.
As an investor, you are putting your money in a mutual fund. It fluctuates with the fund’s investments. If the companies that the fund invests in do well, the share price of the company will increase, so the value of your mutual fund’s NAV will also increase.
NAV (NET ASSET VALUE)
Now the question that comes into your mind is that. What is this NAV now? So, let us understand with the previous example where you bought the 1 dozen bananas with three people and you got 3 bananas for ₹30 right… so now the value of each banana is ₹10 rupees and 1 banana is 1 unit and the value of unit is ₹10 rupees. NAV is the same thing as mutual funds.
The cost of one mutual fund share is known as the NAV, or net asset value. It displays the current value of each share for you.
Here is the pool of ₹120. 12 bananas are the 12 units in the pool. The value of each unit is ₹10. So, the NAV is ₹10 here.
Now you know what a mutual fund is and what a NAV is. In short, we know that mutual funds are nothing but a bundle of companies managed by fund houses. And NAV is the value of that mutual fund.
But the question is, how can we invest in this mutual fund? Do we just have to go to the unit of a mutual fund, like a share of the company, or is there any other way? Let’s understand that…
How do I invest in mutual funds?
You can invest in two ways in mutual funds as a retail investor.
- SIP
- Lumpsum
SIP (Systematic Investment Plan)​
Let’s first understand the SIP (Systematic Investment Plan). You have heard this term many times over the internet. You used to hear that do the SIPs of this year and make crores, right?
SIP is nothing but an investment plan. In your childhood, many times you have gathered money in your Gullak (piggy bank). If you want to buy a toy for ₹120 and you plan to buy that toy in the next six months, you decide to put ₹20 every month in your Gullak. SIP is the same thing, but here you will not only accumulate, but it will also grow.
A systematic investment plan (SIP) is a method of investing small amounts of money into mutual funds on a regular basis. It’s similar to setting aside a small amount of money every month for your future—instead of saving, you’re investing it to make it grow over time.
In SIP, you invest a fixed amount of money in the mutual fund every month. But if you decide to make an SIP of ₹5000 every month,. So, you have to put only ₹5000; you can’t increase or decrease the amount for the particular plan.
But what if I start a SIP of ₹5000 but don’t have money in a particular month?
In that case, you can skip the SIP for that month; most of the fund houses will not charge you any money.
In SIP, mutual fund houses also allow you to increase your SIP amount from six months to one year.Â
Lumpsum​
Let us now come to the lump payment method. Don’t worry, it is the simplest one to understand. It is as simple as in childhood when you visit your nanny’s home and she gives you the ₹500. Now you are happy with this lump-sum amount. I know it is just ₹500, but for a child, it is a lump sum. So now you just want to put this in your Gullak (piggy bank). For future use.
A lump-sum investment in a mutual fund is when you put a big chunk of money into the fund all at once, instead of adding it gradually over time.
In the same way, when you have a lump-sum amount, you can directly invest in the mutual fund with the lump-sum amount. But the minimum amount needed for most of the mutual funds is ₹5000, and there is flexibility to add more amounts later to the same lump-sum investment. That depends on the mutual fund houses, like how they allow, for example, you to invest in 1000s.
Lumpsum investments can be beneficial during market dips. It will benefit you as you will get mutual funds with a lower NAV (Net Asset Value), Which we discussed earlier. I hope you remember 😊.
For Selecting right Mutual Fund you can refer to this How to Select High Return Mutual Funds in 2025
XIRR (Extended Internal Rate of Return)
Yes, the term that scared most of us, and believe me, many people who have been investing in mutual funds for years still don’t understand it.
So let me try to make it simpler for you. Now let’s assume you invested ₹60,000 in a mutual fund using the lump-sum method on January 1st. On January 1st, the NAV of a mutual fund was ₹100, and after a year, it is now ₹115. So here, the calculation is simple:
(115/100)*100 = 15% increase
Don’t get scared by these calculations coming up. Remember, NAV is nothing but the price of the mutual fund. And it just increases to 15% in a year, so here the annualised return is 15% and your profit is ₹9000.
Now what if instead of putting ₹60000 together, you invest ₹5000 each month? So here is your NAV for the
January = 100
February = 102
March= 104…
And until December, every month has a different NAV.
so, calculating profit in the end becomes complex, and to solve that problem, this complex formula was invented. And it makes people’s lives complex.
But you don’t have to worry. In the above investment of ₹5000 every month, if your XIRR is again 15%, that means your annulled return is 15%.
Confused? Look at the profit now that you invest ₹5000 every month, which means
₹5000 x 12 = ₹60000
And your XIRR is 15%.
So, 15% of ₹60000 = ₹9000
Yes, again, the same profit of ₹9000 on an investment of ₹60000,
which means XIRR is nothing but an annulled return.
You don’t have to worry about its formula; just understand that it is nothing but the annulled return.
XIRR for SIP (Systematic Investment Plan) calculates the annualized return on investments made at regular intervals.
Conclusion
We have to understand what a mutual fund is and how it works with the banana example.
You can go through the internet now to understand the formal definitions of mutual funds.
We have also understood the meaning of NAV (net asset value), which is nothing but the price tag of the mutual fund.
Then there are methods like SIP and Lumpsum, where you can invest money every month vs. investing in one go. I will further explain SIP vs Lumpsum in future blogs.
I would also like to take up the topic of FD vs Mutual funds.
Comment below if you would like to hear about that topic in simple terms, like how we covered it.
Other than all this, we understand the scariest term, XIRR. Which is nothing but the annualised rate of return and yes, you don’t need to understand its formula to invest in the mutual fund.
Hopefully, you have understood that term. If not, you can comment down.
Please comment on the other topics you want us to write on.