Saving & Investing · Updated 1 November 2026 · 8 min read
In short: a mutual fund pools money from many people and invests it for them. You can start with a few hundred rupees a month. The one cost most beginners miss is the expense ratio, a yearly fee taken quietly from your money every day. Over 15 years, choosing the direct plan instead of the regular plan of the same fund can leave you about ₹3,67,770 richer on a ₹10,000 monthly SIP. Try your own numbers in our mutual fund calculator.
What is a mutual fund?
A mutual fund collects money from thousands of investors and a professional fund manager invests it in shares, bonds or both. You get units for your money. The price of one unit is the NAV (net asset value), worked out at the end of every trading day.
Instead of picking 30 shares yourself, one fund gives you a ready-made basket. SEBI regulates every fund in India, and your money is held by a separate custodian bank, not by the fund house.
The main types of funds
| Type | Invests in | Suits | Risk |
|---|---|---|---|
| Equity funds (large cap, flexi cap, mid and small cap) | Company shares | Goals 5+ years away | High; can fall 20–40% in bad years |
| Index funds and ETFs | All shares in an index, like the Nifty 50 | Low-cost, long-term investing | Same as the index |
| Debt funds (liquid, short duration) | Bonds, treasury bills, deposits | Parking money for months to a few years | Low to moderate |
| Hybrid funds | A mix of shares and bonds | A smoother ride than pure equity | Moderate |
| ELSS (tax-saving) funds | Shares, with a 3-year lock-in | Old tax regime users claiming 80C | High |
SIP or lump sum?
- SIP (systematic investment plan): a fixed amount goes in every month, automatically. You buy more units when prices are low and fewer when high, and you build a habit. Best for salaried people.
- Lump sum: you invest a big amount once, such as a bonus. If markets fall soon after, it hurts more. Many people spread a lump sum over 6 to 12 months.
The expense ratio: the cost most people miss
Every fund charges a yearly fee to run your money: the fund manager’s salary, research, admin and, in a regular plan, the commission paid to the person or app that sold it to you. This fee is the expense ratio, also called TER (total expense ratio), and it is shown as a percentage, such as 1.5% a year.
Here is why people miss it: you never get a bill. The fund takes a tiny slice (the yearly rate divided by 365) out of its assets every day, before publishing the NAV. The returns you see in your app are already after the fee. It feels free, but it isn’t.
How 1% becomes lakhs: a worked example
Take a SIP of ₹10,000 a month for 15 years, and assume the fund earns 12% a year before costs. You put in ₹18,00,000 in total.
| Expense ratio | Value after 15 years | Lost to fees | |
|---|---|---|---|
| No fees at all (for comparison) | 0% | ₹47,59,314 | – |
| Direct plan | 0.6% | ₹45,21,891 | ₹2,37,423 |
| Regular plan, same fund | 1.6% | ₹41,54,122 | ₹6,05,192 |
Same fund, same manager, same shares. The only difference is the plan, and it costs about ₹3,67,770. The fee is charged on your whole balance every year, so it grows as your money grows, and the money taken out can no longer compound for you.
It matters for one-time investments too. ₹1 lakh left for 20 years at 12% before costs grows to about ₹9,30,756 in an index fund charging 0.2%, but only about ₹8,06,231 in a fund charging 1%.
Direct plan vs regular plan
| Direct plan | Regular plan | |
|---|---|---|
| Where you buy it | Fund house website or app, MF Central, or apps that offer direct plans | Distributor, agent, bank relationship manager or broker |
| Commission | None | Built into the expense ratio, every year you stay invested |
| Expense ratio | Lower | Usually 0.5 to 1.5 percentage points higher |
| Fund manager and portfolio | Same | Same |
The plan name always tells you which one you have, for example “XYZ Flexi Cap Fund, Direct Plan, Growth”. If you value an adviser’s help, a regular plan can be fine, but know what you are paying for it. Another option is a SEBI-registered investment adviser who charges a flat fee and recommends direct plans.
What SEBI allows funds to charge (from 1 April 2026)
SEBI caps the fees. From 1 April 2026 the limit applies to the Base Expense Ratio, the fund’s own costs. Statutory charges such as GST, STT and stamp duty are now shown separately on top of it.
| Fund type | Maximum base expense ratio |
|---|---|
| Equity, first ₹500 crore of fund size | 2.10% |
| Equity, very large funds | falls in steps down to 0.95% |
| Debt and other funds, first ₹500 crore | 1.85% |
| Index funds and ETFs | 0.90% |
Fund houses can change the expense ratio within these limits, and must tell investors before raising it.
Other costs to know
- Exit load: a charge (often 1%) if you sell within a set time, commonly 1 year for equity funds. Check the fund’s factsheet.
- Stamp duty: 0.005% on every purchase, small but real.
- Tax on gains (FY 2026-27): for equity funds, 12.5% on long-term gains above ₹1.25 lakh a year if held more than 12 months, and 20% if sold within 12 months. Debt funds bought after 1 April 2023 are taxed at your income tax slab rate, whenever you sell.
How to start, step by step
- Finish KYC once with your PAN and Aadhaar, on any fund house or registrar website.
- Write down the goal and when you need the money. Under 3 years: debt or liquid funds. 5+ years: equity or index funds.
- Pick 1 to 3 funds, not 10. For many beginners a Nifty 50 index fund is a simple, low-cost start.
- Choose the Direct plan and the Growth option.
- Set up a SIP on a date just after your salary arrives, and increase it every year.
- Check the expense ratio before you invest, and use our mutual fund calculator to see what it will cost you over the years.
Common mistakes
- Buying the regular plan without knowing it, through a bank or agent.
- Picking last year’s top performer. Past returns don’t repeat reliably.
- Stopping SIPs when markets fall, which is exactly when units are cheapest.
- Holding many similar funds that own the same shares.
- Ignoring the expense ratio because “it’s only 1%”.
Frequently asked questions
Is it safe to invest in mutual funds?
Mutual funds are regulated by SEBI and your money is held by a custodian, not the fund house. But equity funds can fall in value, sometimes sharply. Safe from fraud is not the same as safe from losses.
How much do I need to start a SIP?
Many funds allow SIPs from ₹100 to ₹500 a month. Start small and increase it as your income grows.
Should I choose growth or IDCW?
For long-term goals most people choose Growth: profits stay invested and compound. IDCW (dividend) pays money out from your own investment and is taxed at your slab rate.
Where can I see all my mutual funds in one place?
Download your Consolidated Account Statement (CAS) free from CAMS, KFintech or MF Central. It shows every fund, plan (direct or regular) and folio linked to your PAN.
Is a lower expense ratio always better?
Between two plans of the same fund, yes, always pick the cheaper one (direct). Between different funds, cost matters, but so do the fund’s strategy, risk and long-term record against its benchmark.
Related: Mutual fund calculator · Savings calculator · Emergency fund basics · All money guides
This guide is for education, not investment advice. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Figures and rules as of 1 November 2026.