
<p>You&#8217;re not alone if selecting the ideal mutual fund mix for your investing objectives has ever left you feeling overwhelmed. Having so many options &#8211; debts, sectors, hybrid, and equity &#8211; makes it easy to get confused. A Fund of Funds (FoF) can help you with that. Think of it as a carefully managed portfolio that makes investments in other mutual funds rather than directly in stocks or bonds. It&#8217;s a lot like hiring an expert in finance to oversee your mutual fund basket so you don&#8217;t have to worry about each decision independently. We&#8217;ll go over the definition of FoFs, the different kinds of FoFs in India, and whether you should include them in your investment plan in this blog.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_FoF_in_a_Mutual_Fund"></span>What is FoF in a Mutual Fund?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>A Fund of Funds (FoF), often referred to as a &#8220;super fund,&#8221; is a type of mutual fund that offers the convenience of investing in multiple mutual funds through a single investment. Instead of directly buying stocks or bonds, the fund manager builds a portfolio by investing in other mutual funds. Think of a FoF like a Netflix subscription for your investments &#8211; rather than choosing individual shows (funds) yourself, you get access to a professionally curated library (diversified portfolio) that saves you time, effort, and research, all managed by experts.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_Does_a_Fund_of_Funds_Work"></span>How Does a Fund of Funds Work?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>The basic principle of a fund of funds strategy is that, in place of investing in individual funds, you may earn greater returns with lower risk by merging different hedge fund strategies into a single portfolio. By providing a more reliable route to possible gains, this diversification seeks to mitigate the volatility seen in fund investing. Funds of funds, which include mutual, exchange-traded, private equity, hedge, and other funds, are available for a variety of strategies. Let’s also look at an example that can help you analyze FoF.&nbsp;</p>



<p>Let&#8217;s say you wish to travel to five different European countries, but the thought of organizing each trip individually seems stressful. Instead, you reserve a guided trip package that manages all the arrangements &#8211; hotels, flights, and sightseeing &#8211; across all locations in one go. &nbsp;<br>&nbsp;<br>In the same way, a FoF makes investments in a pre-selected combination of mutual funds (such as debt, equity, or international funds) that are suited to fulfil a certain objective. The FoF manager handles the tedious process of researching and purchasing ten distinct funds instead of you. They spread your money among the best-performing funds, which automatically rebalance when markets move and save time, so there is no need to monitor several funds.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Types_of_Funds_of_Funds_in_India"></span>Types of Funds of Funds in India&nbsp;<span class="ez-toc-section-end"></span></h2>



<ol start="1" class="wp-block-list">
<li><strong>Asset Class-Based FoFs</strong>: These make simultaneous investments in debt, equities, and gold funds. Ideal for auto-balancing between stable (debt/gold) and high-growth (equity) assets. For instance, a multi-asset fund may allocate your funds among a gold ETF, a corporate bond fund, and the Nifty 50 fund. </li>
</ol>



<ol start="2" class="wp-block-list">
<li><strong>International FoFs</strong>: Want to include Google or Apple in your portfolio? You don&#8217;t need a foreign broking account because these FoFs invest in international mutual funds and exchange-traded funds (ETFs). For instance, a US-focused FoF might provide you with hassle-free exposure to the Nasdaq or S&amp;P 500. </li>
</ol>



<ol start="3" class="wp-block-list">
<li><strong>ETF-Based FoFs</strong>: If you admire ETFs but loathe DEMAT account management, these FoFs make ETF investments on your behalf. For instance, a Gold FoF invests your money in gold ETFs; no real gold or DEMAT is required. </li>
</ol>



<ol start="4" class="wp-block-list">
<li><strong>Thematic/Sectoral FoFs</strong>: Invest in several sector-specific funds at once to place bets on trends (tech, ESG, healthcare). For instance, a tech fund may combine an India IT fund with a NASDAQ ETF to gain exposure to the global tech market. </li>
</ol>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Advantages_and_Disadvantages_of_FoF"></span>Advantages and Disadvantages of FoF&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Let&#8217;s break down the pros and cons of investing in a fund of funds.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Advantages_of_FoF"></span>Advantages of FoF&nbsp;<span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>You can access premium funds by investing in distinct opportunities that are often reserved for the big investors. </li>
</ul>



<ul class="wp-block-list">
<li>Benefit from instant diversification by investing in various funds with one investment. </li>
</ul>



<ul class="wp-block-list">
<li>Trust experts to choose and rebalance funds. </li>
</ul>



<ul class="wp-block-list">
<li>Gain broad exposure without researching numerous funds, thus making it a very simple process. </li>
</ul>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Disadvantages_of_FoF"></span>Disadvantages of FoF&nbsp;<span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>You pay multilayered expenses (FoF plus underlying fund fees). </li>
</ul>



<ul class="wp-block-list">
<li>Over-diversification can lead to depleted returns, limiting your potential gains. </li>
</ul>



<ul class="wp-block-list">
<li>Difficult to track where your money is invested. </li>
</ul>



<ul class="wp-block-list">
<li>Limited transparency as underlying holdings are not always clear. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Who_Should_Invest_in_a_Fund_of_Funds"></span>Who Should Invest in a Fund of Funds?&nbsp;<span class="ez-toc-section-end"></span></h2>



<ul class="wp-block-list">
<li><strong>First-time investors looking for easy diversification:</strong> FoFs allow you to control many funds with a single click—there is no need for selecting separate schemes. Ideal for you if you are new to investing and want immediate diversification without having to do extensive analysis. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Investors focus on global markets</strong>: Want to include multinational companies (MNCs) in your portfolio? International FoFs provide overseas exposure without the complexities of foreign broking accounts. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Long-term goal planners:</strong> Multi-asset funds of funds balance equities (growth), debt (stability), and gold (hedge), making them ideal for five-year or longer goals. </li>
</ul>



<ul class="wp-block-list">
<li><strong>ETF enthusiasts without a DEMAT account: </strong>Gold or index ETF-based FoFs allow you to effortlessly invest in ETFs without the requirement for a DEMAT account. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Busy professionals prefer hands-off investment</strong>: No time to monitor markets? FoFs automate fund selection and rebalancing, ensuring that your portfolio remains balanced with minimal effort. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Direct_vs_Regular_FoFs_Which_One_to_Choose"></span>Direct vs Regular FoFs: Which One to Choose?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>So you&#8217;ve decided to invest in a FoF.  However, you now face a common split in the road: should you choose a Direct FoF strategy or a Regular FoF plan?&nbsp;<br>&nbsp;<br>On the surface, both appear to come with the same benefit: access to a professionally managed portfolio that invests in other mutual funds. However, there is one significant difference between them &#8211; cost, which will ultimately influence your returns.&nbsp;<br>&nbsp;<br>Let&#8217;s break this down so you can confidently choose what&#8217;s best for you.&nbsp;</p>



<p>Primarily, the difference between the two is that the direct plan of a fund of funds enables you to invest without needing a financial distributor or advisor; you’re essentially doing the research yourself, selecting and managing the investments through the fund house&#8217;s online portal or app. Considering there is no middleman, the fund&#8217;s expense ratio is also lower.&nbsp;</p>



<p>On the other hand, the regular plan requires a third-party distributor or adviser who helps you in selecting a fund, leads you through the process, and can offer portfolio guidance over time. The fund charges a slightly higher expense ratio for this, which includes any commissions or fees paid to the facilitators.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Ultimately, the right choice depends on your ability to manage investments independently, your understanding of asset allocation and risk management, and how well you grasp the dynamics of various asset classes like equity, debt, gold, and international funds. Assess your comfort level and financial knowledge before deciding what works best for you.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_does_FoF_mean_in_mutual_funds"></span>What does FoF mean in mutual funds? <span class="ez-toc-section-end"></span></h3>



<p>A fund of funds (Fof) is a mutual fund that invests in other mutual funds rather than equities or bonds. It delivers instant diversification by combining your money into numerous funds (equity, debt, or international) all in one transaction. It&#8217;s great for investors who seek ready-made portfolios without having to choose individual funds.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Is_investing_in_fund_of_funds_a_good_idea"></span>Is investing in fund of funds a good idea? <span class="ez-toc-section-end"></span></h3>



<p>Investing in FoF offers quick diversification without the need for individual funds, if you prefer hands-off investing (professionals can rebalance), and need easy access to global/international markets. However, expect increased fees (double-layered expenses) and perhaps compromised results. Ideal for long-term investors who value convenience above maximum returns.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="How_can_I_invest_in_a_fund_of_funds_scheme"></span>How can I invest in a fund of funds scheme? <span class="ez-toc-section-end"></span></h3>



<p>You first pick a platform, complete your KYC if you are new to investing, choose a FoF based on your goal, and lastly invest your funds; you can choose between lump-sum and SIP.&nbsp;</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_is_FoF_in_a_Mutual_Fund" >What is FoF in a Mutual Fund?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#How_Does_a_Fund_of_Funds_Work" >How Does a Fund of Funds Work?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Types_of_Funds_of_Funds_in_India" >Types of Funds of Funds in India&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Advantages_and_Disadvantages_of_FoF" >Advantages and Disadvantages of FoF&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-5" href="#Advantages_of_FoF" >Advantages of FoF&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-6" href="#Disadvantages_of_FoF" >Disadvantages of FoF&nbsp;</a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Who_Should_Invest_in_a_Fund_of_Funds" >Who Should Invest in a Fund of Funds?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Direct_vs_Regular_FoFs_Which_One_to_Choose" >Direct vs Regular FoFs: Which One to Choose?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Conclusion" >Conclusion&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#FAQs" >FAQs&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-11" href="#What_does_FoF_mean_in_mutual_funds" >What does FoF mean in mutual funds? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#Is_investing_in_fund_of_funds_a_good_idea" >Is investing in fund of funds a good idea? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-13" href="#How_can_I_invest_in_a_fund_of_funds_scheme" >How can I invest in a fund of funds scheme? </a></li></ul></li></ul></nav></div>


What is FoF in Mutual Fund? Meaning, Types & Benefits Explained

What is FoF in a Mutual Fund? Meaning, Types, Benefits & More 


<h2 class="wp-block-heading"><span class="ez-toc-section" id="Introduction_to_Mutual_Funds"></span>Introduction to Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>When you invest in a mutual fund, you&#8217;re tapping into a professionally managed pool of securities like equities, bonds, or hybrids. The professional asset management company (AMC) handles everything from selecting your assets to tracking their performance. The main thing you need to decide is how you want to invest &#8211; directly or via an intermediary? This decision affects your costs, control, and ultimately, your returns. Let’s break down what direct and regular mutual funds are, the differences between them, the pros and cons of each, and how to invest in them.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_a_Direct_Mutual_Fund"></span>What Is a Direct Mutual Fund?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>A direct mutual fund is one you buy straight from the AMC, without going through a broker or financial adviser. You can invest via the AMC’s website or app, or through SEBI-registered advisers who charge a separate fee. Since there’s no distributor commissions baked into the plan, the expense ratio or the annual operating cost is much lower, and you research and select the funds yourself.&nbsp; As a result, more of your money remains invested, helping you earn more over time. Even a 1% cut in expenses can add up to ₹10+ lakhs over 20 years. In simple words, these are great for you if you’re comfortable with managing your portfolio yourself.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_a_Regular_Mutual_Fund"></span>What Is a Regular Mutual Fund?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>With a regular mutual fund, you invest through an intermediary like an agent, broker, distributor or adviser. They handle the paperwork, select your funds, and provide continuing advice. For their service, the AMC includes a commission in the expense ratio, making it more expensive than direct plans. Although this includes an additional fee, it comes with adviser support, so you are guided with the know your customer (KYC), a systematic investment plan (SIP), and portfolio management. The fees, however, do reduce your overall returns. These are best for beginners who require guidance and are willing to accept slightly lower returns for convenience.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Direct_vs_Regular_Mutual_Fund_Key_Differences"></span>Direct vs Regular Mutual Fund: Key Differences&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Breaking down the difference between direct and regular mutual funds can help you better decide what is more suitable for you.&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td>Characteristic&nbsp;</td><td>Direct Mutual Fund&nbsp;</td><td>Regular Mutual Fund&nbsp;</td></tr><tr><td>Intermediary&nbsp;</td><td>None, you invest directly.&nbsp;</td><td>Through a broker or adviser.&nbsp;</td></tr><tr><td>Total expense ratio (TER)&nbsp;</td><td>Lower, excludes distributor fees.&nbsp;</td><td>Higher, commission based.&nbsp;</td></tr><tr><td>Net asset value (NAV)&nbsp;</td><td>Higher (net of lower expenses)&nbsp;</td><td>Lower due to embedded fees.&nbsp;</td></tr><tr><td>Returns&nbsp;</td><td>Potentially 0.5–1% higher annually.&nbsp;</td><td>Slightly lower because fees chip away over time.&nbsp;</td></tr><tr><td>Convenience&nbsp;</td><td>No adviser, DIY approach needed.&nbsp;</td><td>Adviser support and handholding.&nbsp;</td></tr><tr><td>Suitable for&nbsp;</td><td>Informed, cost-sensitive investors.&nbsp;</td><td>Beginners seeking advice.&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Which_Is_Better_Direct_or_Regular_Mutual_Fund"></span>Which Is Better: Direct or Regular Mutual Fund?&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Direct_Mutual_Funds%E2%80%94Pros_Cons"></span>Direct Mutual Funds—Pros &amp; Cons&nbsp;<span class="ez-toc-section-end"></span></h3>



<p><strong>Pros</strong>&nbsp;</p>



<ul class="wp-block-list">
<li>You save <a href="https://www.hdfclife.com/insurance-knowledge-centre/investment-for-future-planning/direct-vs-regular-mutual-fund?" target="_blank" rel="noreferrer noopener">0.7–1.5%</a> annually in fees, which compounds over time. </li>
</ul>



<ul class="wp-block-list">
<li>Investments grow faster since NAV isn’t reduced by commissions. </li>
</ul>



<ul class="wp-block-list">
<li>Full transparency; no hidden charges. </li>
</ul>



<p><strong>Cons</strong>&nbsp;</p>



<ul class="wp-block-list">
<li>You need to handle research, fund selection, and tracking yourself. </li>
</ul>



<ul class="wp-block-list">
<li>Requires financial literacy and regular monitoring. </li>
</ul>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Regular_Mutual_Funds%E2%80%94Pros_Cons"></span>Regular Mutual Funds—Pros &amp; Cons&nbsp;<span class="ez-toc-section-end"></span></h3>



<p><strong>Pros</strong>&nbsp;</p>



<ul class="wp-block-list">
<li>You get professional support: goal planning, KYC assistance, portfolio monitoring. </li>
</ul>



<ul class="wp-block-list">
<li>A relational touch &#8211; good for first-time investors. </li>
</ul>



<p><strong>Cons</strong>&nbsp;</p>



<ul class="wp-block-list">
<li>Higher costs eat into your returns in the long term. </li>
</ul>



<ul class="wp-block-list">
<li>Potential conflict of interest; some advisers can push high-commission funds. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_Much_Difference_Does_Cost_Make"></span>How Much Difference Does Cost Make?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Even a 0.5% annual cost difference adds up. Here’s an example:&nbsp;</p>



<p>Say you hold a ₹10,000 monthly SIP with a 12% annual return before fees and a 0.5% expense difference&nbsp;</p>



<p>After 15 years, you would get:&nbsp;</p>



<ul class="wp-block-list">
<li>Direct Plan ≈ ₹47.6 lakh </li>
</ul>



<ul class="wp-block-list">
<li>Regular Plan ≈ ₹45.6 lakh </li>
</ul>



<p>That ₹2 Lakh gap shows how cost compounding works in your favor with direct plans.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_to_Invest_in_Direct_Mutual_Funds"></span>How to Invest in Direct Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>There are a few steps you need to follow to go ahead with your direct mutual fund investments.&nbsp;</p>



<ol start="1" class="wp-block-list">
<li>Use AMC websites/apps or investment platforms. </li>
</ol>



<ol start="2" class="wp-block-list">
<li>Research funds: check track record, TER, portfolio allocation. </li>
</ol>



<ol start="3" class="wp-block-list">
<li>Complete KYC &#8211; done online or offline. </li>
</ol>



<ol start="4" class="wp-block-list">
<li>Invest via SIP or lump sum directly through the AMC platform. </li>
</ol>



<ol start="5" class="wp-block-list">
<li>Track your portfolio and rebalance it as needed. </li>
</ol>



<p>Many platforms also let you switch from regular to direct plans, though it&#8217;s treated as a redemption and new investment, so capital gains tax may apply.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion_Choose_What_Fits_Your_Goal"></span>Conclusion: Choose What Fits Your Goal&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>If you&#8217;re hands-on and want higher returns with lower costs, go with direct plans. On the other hand, if you prefer professional guidance and are willing to pay for it, a regular plan makes sense. Whichever route you pick, stay informed, review regularly, and align with your goals. Both paths lead to investment success, but costs, control, and convenience will shape your journey.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_is_the_difference_between_a_direct_and_a_regular_mutual_fund"></span>What is the difference between a direct and a regular mutual fund? <span class="ez-toc-section-end"></span></h3>



<p>Direct plans are bought straight from AMC resulting in lower expense ratios and higher NAVs. Regular plans include broker commissions in their expense ratios.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Are_direct_mutual_funds_better_than_regular_mutual_funds"></span>Are direct mutual funds better than regular mutual funds? <span class="ez-toc-section-end"></span></h3>



<p>Direct plans usually deliver higher long-term returns due to lower fees but require your own invested time for research and tracking.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Can_I_switch_from_a_regular_mutual_fund_to_a_direct_mutual_fund"></span>Can I switch from a regular mutual fund to a direct mutual fund? <span class="ez-toc-section-end"></span></h3>



<p>Yes, most AMCs or investment platforms let you switch. Be aware that it counts as a redemption and purchase, attracting taxes and possibly exit loads.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Do_direct_mutual_funds_offer_higher_returns"></span>Do direct mutual funds offer higher returns? <span class="ez-toc-section-end"></span></h3>



<p>Typically, 0.5–1% higher annually, which can add up to tens of thousands or more over the years.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="How_can_I_identify_if_my_mutual_fund_is_direct_or_regular"></span>How can I identify if my mutual fund is direct or regular? <span class="ez-toc-section-end"></span></h3>



<p>The fund name will usually include &#8220;Direct&#8221; or &#8220;Regular&#8221;. Direct plans have lower TER and higher NAV. You can also check your CAS: regular plans list distributor ARN.</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#Introduction_to_Mutual_Funds" >Introduction to Mutual Funds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#What_Is_a_Direct_Mutual_Fund" >What Is a Direct Mutual Fund?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#What_Is_a_Regular_Mutual_Fund" >What Is a Regular Mutual Fund?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Direct_vs_Regular_Mutual_Fund_Key_Differences" >Direct vs Regular Mutual Fund: Key Differences&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Which_Is_Better_Direct_or_Regular_Mutual_Fund" >Which Is Better: Direct or Regular Mutual Fund?&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-6" href="#Direct_Mutual_Funds%E2%80%94Pros_Cons" >Direct Mutual Funds—Pros &amp; Cons&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-7" href="#Regular_Mutual_Funds%E2%80%94Pros_Cons" >Regular Mutual Funds—Pros &amp; Cons&nbsp;</a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#How_Much_Difference_Does_Cost_Make" >How Much Difference Does Cost Make?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#How_to_Invest_in_Direct_Mutual_Funds" >How to Invest in Direct Mutual Funds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Conclusion_Choose_What_Fits_Your_Goal" >Conclusion: Choose What Fits Your Goal&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#FAQs" >FAQs&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#What_is_the_difference_between_a_direct_and_a_regular_mutual_fund" >What is the difference between a direct and a regular mutual fund? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-13" href="#Are_direct_mutual_funds_better_than_regular_mutual_funds" >Are direct mutual funds better than regular mutual funds? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-14" href="#Can_I_switch_from_a_regular_mutual_fund_to_a_direct_mutual_fund" >Can I switch from a regular mutual fund to a direct mutual fund? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-15" href="#Do_direct_mutual_funds_offer_higher_returns" >Do direct mutual funds offer higher returns? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-16" href="#How_can_I_identify_if_my_mutual_fund_is_direct_or_regular" >How can I identify if my mutual fund is direct or regular? </a></li></ul></li></ul></nav></div>


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What is a Direct and Regular Mutual Fund: Difference, Pros & Cons  


<p>When you&#8217;re exploring ways to grow your money, you’ve probably come across both chit funds and mutual funds. While they might sound similar &#8211; pooling money from people -they work very differently. Understanding the key differences between the two can help you make a smarter choice depending on your goals, risk tolerance, and liquidity needs. In this blog, you’ll get a clear comparison of chit funds and mutual funds &#8211; how they work, the risks they come with, and which one fits your overall financial goals best.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_a_Chit_Fund_and_How_Does_It_Work"></span>What Is a Chit Fund and How Does It Work?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>A chit fund is a group saving and borrowing scheme. Think of it as a rotating savings club. Each month, you and a bunch of other members contribute a fixed amount into a common pool. At regular intervals, one member gets access to the pool, either by lottery or through an auction where the person willing to take the lowest amount wins the pot.&nbsp;</p>



<p>Here’s how it typically plays out:&nbsp;</p>



<ul class="wp-block-list">
<li>Let’s say you&#8217;re part of a chit group with 20 people, each contributing ₹5,000 per month. </li>
</ul>



<ul class="wp-block-list">
<li>Every month, ₹1,00,000 is collected. </li>
</ul>



<ul class="wp-block-list">
<li>The person who bids to take the lowest amount (say ₹85,000) gets it. </li>
</ul>



<ul class="wp-block-list">
<li>The leftover ₹15,000 (after a commission to the organizer) is distributed among the rest. </li>
</ul>



<ul class="wp-block-list">
<li>This continues until everyone has received the pooled sum. </li>
</ul>



<p>Chit funds are common in India, especially in small towns and among people who prefer community-based saving techniques. Nevertheless, they do come with their risks, particularly if you&#8217;re dealing with unregistered or informal chit groups.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_a_Mutual_Fund_and_How_Does_It_Work"></span>What Is a Mutual Fund and How Does It Work?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>A mutual fund is a professionally managed investment product where your money is pooled with other investors and invested in various securities like stocks, bonds, or a mix of both. A professional fund manager handles the portfolio, aiming to maximize your returns while keeping the risk minimal.&nbsp;</p>



<p>Here’s how it works for you:&nbsp;</p>



<ul class="wp-block-list">
<li>You choose a fund that aligns with your goals (like growth, income, or tax-saving). </li>
</ul>



<ul class="wp-block-list">
<li>You invest a lump sum or start a SIP (Systematic Investment Plan). </li>
</ul>



<ul class="wp-block-list">
<li>Your returns are based on the performance of the fund’s underlying assets. </li>
</ul>



<p>Mutual funds in India are regulated by <a href="https://www.sebi.gov.in/" target="_blank" rel="noreferrer noopener">SEBI (Securities and Exchange Board of India)</a> to ensure transparency, prevent leaks, and protect you. They’re also more flexible; you can redeem your money whenever you need it (except in closed-ended or tax-saving schemes).&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Chit_Fund_vs_Mutual_Fund_Key_Differences_You_Should_Know"></span>Chit Fund vs Mutual Fund: Key Differences You Should Know&nbsp;<span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td>Feature&nbsp;</td><td>Chit Fund&nbsp;</td><td>Mutual Fund&nbsp;</td></tr><tr><td>Goal&nbsp;</td><td>Savings + borrowing.&nbsp;</td><td>Wealth creation.&nbsp;</td></tr><tr><td>Managed By&nbsp;</td><td>Organizer.&nbsp;</td><td>Professional fund managers.&nbsp;</td></tr><tr><td>Returns&nbsp;</td><td>Variable according bid; not fixed.&nbsp;</td><td>Market-linked; can compound well.&nbsp;</td></tr><tr><td>Risk&nbsp;</td><td>Default or fraud risk (organizer/participants).&nbsp;</td><td>Market risk but regulated.&nbsp;</td></tr><tr><td>Liquidity&nbsp;</td><td>Low &#8211; funds released based on your needs.&nbsp;</td><td>High &#8211; redeem anytime (open-ended funds).&nbsp;</td></tr><tr><td>Transparency&nbsp;</td><td>Low &#8211; especially in unregistered chit funds.&nbsp;</td><td>High &#8211; NAVs and holdings disclosed.&nbsp;</td></tr><tr><td>Regulation&nbsp;</td><td>Governed by the state chit fund acts.&nbsp;</td><td>SEBI-regulated.&nbsp;</td></tr><tr><td>Charges&nbsp;</td><td>High commission (up to 5–10%).&nbsp;</td><td>Expense ratios (typically 0.5–2.5%).&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Returns_Which_Option_Offers_Better_Gains"></span>Returns: Which Option Offers Better Gains?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>If you&#8217;re looking for predictable short-term access to funds, chit funds might seem attractive, especially if you &#8220;win&#8221; early in the cycle. The returns you get often depend on how much of a discount you agree to during the auction and how much commission the organizer charges.&nbsp;</p>



<p>Mutual funds, on the other hand, are built for long-term wealth creation. While returns aren’t guaranteed, historically, equity mutual funds have delivered 10–15% annualized returns over the long run. Debt mutual funds offer lower returns, but with relatively less risk.&nbsp;</p>



<p>So, if your focus is growing your money over 3–5+ years, mutual funds typically win.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Safety_and_Regulation_Which_Ones_Safer"></span>Safety and Regulation: Which One’s Safer?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Let’s be real &#8211; safety matters, especially when your hard-earned money is on the line.&nbsp;</p>



<ul class="wp-block-list">
<li>Chit funds, especially unregistered ones, are notorious for scams. You may have heard of incidents where organizers vanished with investors’ money. Even registered chit funds offer no guarantee of repayment if another participant defaults. </li>
</ul>



<ul class="wp-block-list">
<li>Mutual funds, however, are stringently monitored by <a href="https://www.sebi.gov.in/" target="_blank" rel="noreferrer noopener">SEBI</a>. Fund houses must disclose holdings, returns, expense ratios, and more. You get regular updates, and your money is held with a custodian, not with the fund house itself. </li>
</ul>



<p>If safety and transparency are your priority, mutual funds are far more reliable.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Liquidity_and_Accessibility"></span>Liquidity and Accessibility&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>If you think you might need your money in a pinch, you’ll want to consider liquidity.&nbsp;</p>



<ul class="wp-block-list">
<li>With chit funds, you’re often locked into the scheme until the entire cycle completes. This could take months or years. Exiting early usually involves penalties or forfeiting benefits. </li>
</ul>



<ul class="wp-block-list">
<li>Mutual funds (especially open-ended funds) let you redeem your money anytime. For ultra-short-term needs, you can look at liquid funds or overnight funds, which allow you to withdraw funds in 24 &#8211; 48 hours. </li>
</ul>



<p>Also, getting started with a mutual fund is easy. Most platforms let you start SIPs with as little as ₹500 per month &#8211; some even less.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Which_Investment_Should_You_Choose_Based_on_Your_Goals"></span>Which Investment Should You Choose Based on Your Goals?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Still wondering what’s right for you? Here’s a simple rule of thumb:&nbsp;</p>



<ul class="wp-block-list">
<li>Choose chit funds if: </li>
</ul>



<ul class="wp-block-list">
<li>You want a disciplined way to save monthly. </li>
</ul>



<ul class="wp-block-list">
<li>You might need a lump sum at a future date. </li>
</ul>



<ul class="wp-block-list">
<li>You personally know and trust the organizer and its members. </li>
</ul>



<ul class="wp-block-list">
<li>Choose mutual funds if: </li>
</ul>



<ul class="wp-block-list">
<li>You’re aiming for long-term financial growth. </li>
</ul>



<ul class="wp-block-list">
<li>You want professional management and diversification. </li>
</ul>



<ul class="wp-block-list">
<li>You value flexibility, liquidity, and regulation. </li>
</ul>



<p>A lot of younger investors prefer mutual funds because of their digital convenience, low entry costs, and tax benefits (especially with ELSS funds).&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Are_chit_funds_safe_for_investment"></span>Are chit funds safe for investment? <span class="ez-toc-section-end"></span></h3>



<p>Chit funds are less safe than regulated choices like mutual funds. While some registered chit funds function legally, many are uncontrolled, increasing the danger of fraud or default. Unlike mutual funds, which are regulated by SEBI, chit funds are based on collective trust. Only invest if you trust the operator and understand the hazards.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Who_regulates_chit_funds_in_India"></span>Who regulates chit funds in India? <span class="ez-toc-section-end"></span></h3>



<p>State governments supervise registered chit funds following the Chit Funds Act of 1982. However, many illicit schemes operate outside of the law. Before investing, always check with local authorities to ensure that operators are registered. SEBI does not regulate chit funds.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Can_I_earn_more_from_chit_funds_than_mutual_funds"></span>Can I earn more from chit funds than mutual funds? <span class="ez-toc-section-end"></span></h3>



<p>Chit funds can offer better short-term returns (12-24% p.a.), but they have a significant default risk. Mutual funds with SEBI protection often earn 10-15% in long-term returns. Chit funds are unreliable sources of long-term capital growth.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Which_is_better_for_short-term_financial_needs_a_chit_fund_or_a_mutual_fund"></span>Which is better for short-term financial needs: a chit fund or a mutual fund? <span class="ez-toc-section-end"></span></h3>



<p>For short-term needs (&lt;3 years), liquid mutual funds (5-8% returns) are more secure than chit funds. Chit funds guarantee immediate cash but run the risk of default. Only consider chit funds if you recognize and trust the group and require immediate money.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_are_the_risks_involved_in_chit_fund_investment"></span>What are the risks involved in chit fund investment? <span class="ez-toc-section-end"></span></h3>



<p>Chit funds carry several risks that investors should be aware of. These include fraud risk, as unregistered operators may disappear with the collected funds; default risk, where members delay or fail to make payments; lack of insurance, since unlike bank deposits, chit fund contributions are not insured; and legal challenges, where recovering money becomes difficult if the group collapses or disputes arise.&nbsp;</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Is_a_Chit_Fund_and_How_Does_It_Work" >What Is a Chit Fund and How Does It Work?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#What_Is_a_Mutual_Fund_and_How_Does_It_Work" >What Is a Mutual Fund and How Does It Work?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Chit_Fund_vs_Mutual_Fund_Key_Differences_You_Should_Know" >Chit Fund vs Mutual Fund: Key Differences You Should Know&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Returns_Which_Option_Offers_Better_Gains" >Returns: Which Option Offers Better Gains?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Safety_and_Regulation_Which_Ones_Safer" >Safety and Regulation: Which One’s Safer?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Liquidity_and_Accessibility" >Liquidity and Accessibility&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Which_Investment_Should_You_Choose_Based_on_Your_Goals" >Which Investment Should You Choose Based on Your Goals?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#FAQs" >FAQs&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-9" href="#Are_chit_funds_safe_for_investment" >Are chit funds safe for investment? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-10" href="#Who_regulates_chit_funds_in_India" >Who regulates chit funds in India? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-11" href="#Can_I_earn_more_from_chit_funds_than_mutual_funds" >Can I earn more from chit funds than mutual funds? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#Which_is_better_for_short-term_financial_needs_a_chit_fund_or_a_mutual_fund" >Which is better for short-term financial needs: a chit fund or a mutual fund? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-13" href="#What_are_the_risks_involved_in_chit_fund_investment" >What are the risks involved in chit fund investment? </a></li></ul></li></ul></nav></div>


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Chit Fund vs Mutual Fund: Which Investment Option Is Right for You? 


<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_Side_Pocketing_in_Mutual_Funds"></span>What Is Side Pocketing in Mutual Funds?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Mutual fund managers isolate distressed, illiquid, or defaulting assets into a distinct &#8220;side pocket&#8221; portfolio as a risk management tool. This enables the main fund to continue operating with improved holdings, thereby enhancing NAV transparency and safeguarding your investments. Only assets recognized as troublesome are relocated, leaving the balance of the portfolio untouched for future subscriptions and redemption.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_Side_Pocketing_Works_A_Step-by-Step_Breakdown"></span>How Side Pocketing Works: A Step-by-Step Breakdown&nbsp;<span class="ez-toc-section-end"></span></h2>



<ol start="1" class="wp-block-list">
<li><strong>Identifying distressed assets</strong>: A credit event, such as a rating downgrades, default, or liquidity crisis, initiates the process. </li>
</ol>



<ol start="2" class="wp-block-list">
<li><strong>Segregation</strong>: The asset management company (AMC) modifies the scheme information document (SID), obtains trustee permission, and forms a separate portfolio. </li>
</ol>



<ol start="3" class="wp-block-list">
<li><strong>Dual-NAV structure</strong>: The original fund&#8217;s NAV is modified downward, deducting the distressed asset value, and a new NAV is generated for the side-pocketed units. </li>
</ol>



<ol start="4" class="wp-block-list">
<li><strong>Investor treatment</strong>: Existing investors are allocated proportional units in both the main and side-pocket portfolios. New investors invest exclusively in the main fund. Current investors have a 30-day no-exit-load opportunity to redeem. After that, the side pocket is non-redeemable until asset recovery. </li>
</ol>



<ol start="5" class="wp-block-list">
<li><strong>Recovery distribution</strong>: Once the separated assets are liquidated/recovered, the profits are dispersed to the side-pocket unit holders. </li>
</ol>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Why_Fund_Houses_Use_Side_Pocketing"></span>Why Fund Houses Use Side Pocketing&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Side pocketing comes with multiple goals:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Protects main fund NAV</strong>: Prevents distressed assets from dragging down a fund’s current value. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Mitigates redemption pressure</strong>: Stops the panic selling of good, strong assets to fund losses. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Ensures fairness</strong>: Productivity from distressed assets is granted only if you have already invested, thus making it fair to you and other potential investors. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="SEBI_Guidelines_on%E2%80%AFSide_Pocketing"></span>SEBI Guidelines on Side Pocketing <span class="ez-toc-section-end"></span></h2>



<p>SEBI has established clear guidelines in December 2018 under Regulation <a href="https://www.finseclaw.com/article/sebi-circular-side-pocketing-mutual-funds" target="_blank" rel="noreferrer noopener">18(5A)</a>, which include: </p>



<ul class="wp-block-list">
<li>Eligibility is limited to debt funds with ≥ ₹1,000 crore AUM and ≥ 5% exposure to distressed assets.  </li>
</ul>



<ul class="wp-block-list">
<li>Amendment of the scheme information document (SID), 30‑day exit-free window, and trustee approval are all mandatory. </li>
</ul>



<ul class="wp-block-list">
<li>Dual-NAV disclosure, periodic valuation, and open reporting are necessary. </li>
</ul>



<ul class="wp-block-list">
<li>To offer liquidity, the side pocket must be exchange-listed within 10 days. </li>
</ul>



<ul class="wp-block-list">
<li>Expense ratios are only applied when recovery occurs, and clawbacks are imposed if misuse is discovered. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Pros_and_Cons_of_Side_Pocketing_for_Investors"></span>Pros and Cons of Side Pocketing for Investors&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Pros"></span>Pros&nbsp;<span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>Shields main valuation from deep credit events. </li>
</ul>



<ul class="wp-block-list">
<li>Stabilizes liquidity and maintains your information in confidence. </li>
</ul>



<ul class="wp-block-list">
<li>Rewards you if you are invested for the long term without penalizing newer investors. </li>
</ul>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Cons"></span>Cons&nbsp;<span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>Side pocket valuations can be dense due to illiquidity. </li>
</ul>



<ul class="wp-block-list">
<li>Liquidity is frozen, and redemption is postponed until complete recovery. </li>
</ul>



<ul class="wp-block-list">
<li>Risks of misuse if managers strategically isolate underperformers. </li>
</ul>



<ul class="wp-block-list">
<li>Dual-portfolio complexity adds tracking burden for you. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Examples_of_Side_Pocketing_in_India"></span>Examples of Side Pocketing in India&nbsp;<span class="ez-toc-section-end"></span></h2>



<ul class="wp-block-list">
<li><strong>Tata Mutual Fund &amp; DHFL (2019)</strong>: When <a href="https://www.ndtvprofit.com/opinion/side-pocketing-in-indian-funds-have-we-finally-seen-a-beginning?" target="_blank" rel="noreferrer noopener">Dewan Housing Finance</a> defaulted, Tata AMC made its first move to side pocket three debt schemes—Tata Corporate Bond Fund, Tata Medium Term Fund, and Tata Treasury Advantage Fund—resulting in NAV declines of 30%, 12%, and 4% respectively. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Franklin Templeton (2020)</strong>: Though it wound up with <a href="https://www.livemint.com/mutual-fund/mf-news/lessons-at-the-crux-of-franklin-templeton-fiasco-11612372554454.html" target="_blank" rel="noreferrer noopener">six credit</a> funds entirely, the groundwork of side pockets had been laid in SEBI’s 2018 framework. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Should_Investors_Be_Worried_About_Side_Pocketing"></span>Should Investors Be Worried About Side Pocketing?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Side pockets are a tool, not a red flag. It illustrates cautious management of risks under regulatory control. You should:&nbsp;</p>



<ul class="wp-block-list">
<li>Review the scheme disclosures to better understand side pocket triggers. </li>
</ul>



<ul class="wp-block-list">
<li>Evaluate fund repute and trustee independence; funds with solid governance are less likely to abuse the mechanism. </li>
</ul>



<ul class="wp-block-list">
<li>Monitor recovery progress by tracking side pockets and individual NAVs. </li>
</ul>



<ul class="wp-block-list">
<li>While frozen capital can challenge your patience, the alternative &#8211; mixing bad assets with strong ones &#8211; is likely to hurt you. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>SEBI-regulated side pocketing protects you in debt mutual funds by isolating weak assets and stabilising performance. The dual-NAV disclosure, exit provisions, and regulatory safeguards ensure a balance between liquidity management and recovery potential. To invest wisely, it&#8217;s important to understand which plans enable it, monitor side-pocket movements, and plan accordingly.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_is_side_pocketing_in_mutual_funds"></span>What is side pocketing in mutual funds? <span class="ez-toc-section-end"></span></h3>



<p>It is the segregation of distressed/illiquid assets into a separate portfolio with its own NAV to protect the main fund from volatility.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="When_is_side_pocketing_typically_used_by_fund_houses"></span>When is side pocketing typically used by fund houses? <span class="ez-toc-section-end"></span></h3>



<p>Triggered after a “credit event” like a downgrade, default, or liquidity freeze, often under ≥5% exposure criteria for large funds.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_are_SEBIs_regulations_on_side_pocketing"></span>What are SEBI’s regulations on side pocketing? <span class="ez-toc-section-end"></span></h3>



<p>Side pocketing involves trustee approval, SID amendments, dual NAV disclosures, a 30-day exit window, and exchange listing within 10 days, per regulations rolled out in December 2018.&nbsp;&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Can_I_redeem_money_from_a_side-pocketed_fund"></span>Can I redeem money from a side-pocketed fund? <span class="ez-toc-section-end"></span></h3>



<p>No, not immediately. You can only exit within the 30-day window postsegregation; afterwards, capital is locked until asset recovery.&nbsp;</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Is_Side_Pocketing_in_Mutual_Funds" >What Is Side Pocketing in Mutual Funds?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#How_Side_Pocketing_Works_A_Step-by-Step_Breakdown" >How Side Pocketing Works: A Step-by-Step Breakdown&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Why_Fund_Houses_Use_Side_Pocketing" >Why Fund Houses Use Side Pocketing&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#SEBI_Guidelines_on%E2%80%AFSide_Pocketing" >SEBI Guidelines on Side Pocketing </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Pros_and_Cons_of_Side_Pocketing_for_Investors" >Pros and Cons of Side Pocketing for Investors&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-6" href="#Pros" >Pros&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-7" href="#Cons" >Cons&nbsp;</a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Examples_of_Side_Pocketing_in_India" >Examples of Side Pocketing in India&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Should_Investors_Be_Worried_About_Side_Pocketing" >Should Investors Be Worried About Side Pocketing?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Conclusion" >Conclusion&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#FAQs" >FAQs&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#What_is_side_pocketing_in_mutual_funds" >What is side pocketing in mutual funds? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-13" href="#When_is_side_pocketing_typically_used_by_fund_houses" >When is side pocketing typically used by fund houses? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-14" href="#What_are_SEBIs_regulations_on_side_pocketing" >What are SEBI’s regulations on side pocketing? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-15" href="#Can_I_redeem_money_from_a_side-pocketed_fund" >Can I redeem money from a side-pocketed fund? </a></li></ul></li></ul></nav></div>


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<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_PMS"></span>What is PMS?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Portfolio Management Services (PMS) are advanced investment solutions designed primarily for high-net-worth individuals (HNIs). Unlike mutual funds, which pool money from many investors into a common fund, PMS offers tailored investment strategies based on your individual risk appetite, investment horizon, and financial goals.&nbsp;</p>



<p>It’s important to note that PMS is not a type of mutual fund. Instead, it serves as an alternative for investors who seek personalized, actively managed portfolios. Under PMS, the investments are held in the investor’s own name, and a professional fund manager makes dynamic decisions aligned with market movements and your unique objectives.&nbsp;</p>



<p>PMS is regulated by the Securities and Exchange Board of India (SEBI) to ensure transparency, accountability, and investor protection.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_Does_PMS_Investment_Work"></span>How Does PMS Investment Work?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>When you invest in a PMS, a portfolio manager is assigned to manage your mutual funds. The manager creates a personalized investment plan, usually involving equities, fixed-income securities, structured products, or a mix of other such asset classes. The steps involved in PMS are as follows:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Define financial goals</strong>: Understand what your financial goals are, along with what your risk appetite looks like.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Pick your assets</strong>: After selecting a portfolio manager and discussing with them your goals, you can now select the most suited asset mix for you. For instance, if you are growth-oriented, your portfolio could be largely composed of equities, while if you were a conservative investor, you would prefer a high proportion of your investments in fixed-income/debt instruments.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Choosing assets within each asset class</strong>: The manager will now carefully choose the schemes within each asset type. While a risk-averse investor might select blue-chip firms, the manager might invest in mid-cap stocks if your plan is focused on growth.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>&nbsp;<strong>Track PMS performance regularly</strong>: The PMS team uses sophisticated portfolio management software to monitor the portfolio&#8217;s performance. They evaluate whether the portfolio still satisfies your goals. If market trends or your financial circumstances alter, you can then make any required adjustments with guidance.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Rebalance to stay on track</strong>: As time changes, how different funds perform changes too. To stay on track with your goals, the portfolio is rebalanced regularly to ensure that your expectations for risk and return align with your overall investment goals.&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="PMS_vs_Mutual_Fund_%E2%80%93_Comparison"></span>PMS vs Mutual Fund – Comparison&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Here is a concise table breaking down the key aspects to keep in mind when evaluating PMS and mutual funds as investment vehicles.&nbsp;</p>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Characteristic</strong>&nbsp;</td><td><strong>PMS</strong>&nbsp;</td><td><strong>Mutual Fund</strong>&nbsp;</td></tr><tr><td>Customization&nbsp;</td><td>Completely personalized.&nbsp;</td><td>Standardized investment strategy.&nbsp;</td></tr><tr><td>Ownership of Securities&nbsp;</td><td>Direct.&nbsp;</td><td>Direct but managed by PMS service provider&nbsp;</td></tr><tr><td>Transparency&nbsp;</td><td>High.&nbsp;</td><td>Moderate.&nbsp;</td></tr><tr><td>Taxation&nbsp;</td><td>Complicated as taxes need to be paid every time portfolio is rebalanced.&nbsp;</td><td>Comparatively easy since investor doesn’t manage investments very actively.&nbsp;</td></tr><tr><td>Fees&nbsp;</td><td>Fixed + performance-based.&nbsp;</td><td>Expense ratio (typically lower).&nbsp;</td></tr><tr><td>Minimum Investment&nbsp;</td><td>₹50 lakh (SEBI-mandated)&nbsp;</td><td>₹500–₹5,000.&nbsp;</td></tr></tbody></table></figure>



<p>While mutual funds offer broad market access at lower costs, PMS provides a high degree of customization if you have substantial capital and specific investment goals.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Minimum_Investment_Required_for_PMS_in_India"></span>Minimum Investment Required for PMS in India&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>As per the SEBI regulations, the minimum investment in PMS is ₹50 lakh. This investment limit ensures that PMS is pitched for you if you are financially equipped to absorb market risks and seek highly active portfolio management.&nbsp;</p>



<p>Additional charges can also include:&nbsp;</p>



<ul class="wp-block-list">
<li>Management Fees&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Performance Fees (based on portfolio returns)&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Custodian Charges&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Audit &amp; Reporting Fees&nbsp;</li>
</ul>



<p>Because of the higher cost structure, PMS is best suited for you if you are expecting performance surpassing conventional products and you are comfortable with equity market risks.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Role_of_the_PMS_Fund_Manager"></span>Role of the PMS Fund Manager&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>The fund manager plays a central role in PMS. They are responsible for:&nbsp;</p>



<ul class="wp-block-list">
<li>Designing and executing the investment strategy.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Researching and selecting securities.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Tracking the market entries and exits.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Frequently rebalancing the portfolio.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Managing risks in alignment with your preferences.&nbsp;</li>
</ul>



<p>In a flexible PMS, the fund manager has complete authority to make decisions, while in more rigid models, you will approve or reject recommendations. A skilled PMS fund manager not only seeks returns but also ensures portfolio efficiency, risk mitigation, and tax optimization.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Benefits_and_Risks_of_PMS_Investment"></span>Benefits and Risks of PMS Investment&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Benefits_of_PMS_Investment"></span>Benefits of PMS Investment&nbsp;<span class="ez-toc-section-end"></span></h3>



<ol class="wp-block-list" start="1">
<li><strong>Tailored Portfolios:</strong> Strategies aligned with your financial goals, tax profile, and risk appetite.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="2">
<li><strong>Higher Transparency:</strong> Direct ownership gives you visibility into every investment decision and its rationale.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="3">
<li><strong>Professional Management:</strong> Access to experienced fund managers and institutional research.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="4">
<li><strong>Flexibility:</strong> Can switch strategies, customize portfolios, and rebalance based on your personal circumstances.&nbsp;</li>
</ol>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Risks_of_PMS_Investment"></span>Risks of PMS Investment&nbsp;<span class="ez-toc-section-end"></span></h3>



<ol class="wp-block-list" start="1">
<li><strong>Market Risk:</strong> Being mostly equity-driven, PMS portfolios are exposed to market volatility.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="2">
<li><strong>Higher Costs:</strong> PMS involves both fixed and performance-based fees, making it more expensive than regular mutual funds.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="3">
<li><strong>Liquidity Risk:</strong> Some PMS strategies may include fewer liquid securities or longer lock-in periods.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="4">
<li><strong>Tax Complexity:</strong> Taxation is on individual transactions, which may complicate tax filing compared to mutual funds.&nbsp;</li>
</ol>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Portfolio management services offer a powerful solution for you if you are a high-net-worth individual seeking a more tailored and actively managed investment experience. With personalized strategies, transparency, and access to expert fund managers, PMS stands apart from traditional mutual funds. However, its benefits come with higher entry requirements and related costs.&nbsp;</p>



<p>If you are considering PMS, you should evaluate your financial capacity, risk appetite, and long-term objectives before opting in. Understanding how PMS compares with mutual funds and where it fits into your financial strategy is essential for making informed decisions in today’s complex investment landscape.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Is_PMS_better_than_mutual_funds_for_long-term_investing"></span>Is PMS better than mutual funds for long-term investing?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>It depends on the investor&#8217;s profile. PMS can deliver superior returns if managed well, but mutual funds offer cost-effective, diversified options suitable for most retail investors.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_are_the_charges_associated_with_PMS_investment"></span>What are the charges associated with PMS investment?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Charges may include management fees (fixed or performance-based), custodial fees, and other administrative costs.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Can_retail_investors_invest_in_PMS"></span>Can retail investors invest in PMS?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Only investors with a minimum investible corpus of ₹50 lakh can access PMS. This often excludes typical retail investors, who would have a smaller investable amount at hand.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Is_PMS_suitable_for_tax-saving_purposes"></span>Is PMS suitable for tax-saving purposes?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>PMS is not a tax-saving instrument like ELSS or PPF. However, efficient portfolio structuring may help in tax optimization.&nbsp;</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_is_PMS" >What is PMS?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#How_Does_PMS_Investment_Work" >How Does PMS Investment Work?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#PMS_vs_Mutual_Fund_%E2%80%93_Comparison" >PMS vs Mutual Fund – Comparison&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Minimum_Investment_Required_for_PMS_in_India" >Minimum Investment Required for PMS in India&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Role_of_the_PMS_Fund_Manager" >Role of the PMS Fund Manager&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Benefits_and_Risks_of_PMS_Investment" >Benefits and Risks of PMS Investment&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-7" href="#Benefits_of_PMS_Investment" >Benefits of PMS Investment&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-8" href="#Risks_of_PMS_Investment" >Risks of PMS Investment&nbsp;</a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Conclusion" >Conclusion&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#FAQs" >FAQs&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-11" href="#Is_PMS_better_than_mutual_funds_for_long-term_investing" >Is PMS better than mutual funds for long-term investing?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#What_are_the_charges_associated_with_PMS_investment" >What are the charges associated with PMS investment?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-13" href="#Can_retail_investors_invest_in_PMS" >Can retail investors invest in PMS?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-14" href="#Is_PMS_suitable_for_tax-saving_purposes" >Is PMS suitable for tax-saving purposes?&nbsp;</a></li></ul></li></ul></nav></div>


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What Is PMS in Mutual Fund? Everything You Need to Know About Portfolio Management Services 


<p>Naturally, mutual funds are taken into consideration for liquidation because they are simple to redeem. You can also possibly use mutual funds to raise money to pay for expenses while preventing early redemptions. In this case, taking out a loan secured by mutual funds can be quite beneficial for you. Let’s discuss what exactly a loan against a mutual fund means, how it works, the advantages, how to apply for one, and whether a loan against a systematic investment plan (SIP) is possible.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_a_Loan_Against_Mutual_Funds"></span>What Is a Loan Against Mutual Funds?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>In simple words, a loan against mutual funds (LAMF) is a kind of secured loan that allows you to borrow money by using your mutual fund investments as collateral. By doing this, you lower the lender&#8217;s credit risk and lower your interest rates as well. This option gives you liquidity without having to redeem your entire mutual fund investment. Typically, LAMF is provided as an overdraft facility, in which you are granted a credit limit based on the mutual funds pledged.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_Does_a_Loan_on_a_Mutual_Fund_Work"></span>How Does a Loan on a Mutual Fund Work?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>A LAMF works on the simple idea that you can borrow funds by pledging your mutual fund holdings to a bank or a financial institution. The idea of lien marking is a crucial part of a LAMF. The lender imposes a lien on your mutual fund units when you pledge them as security for the loan. In the unlikely scenario that you are unable to repay the loan; the lender will have a legitimate claim to your mutual funds. You still own the mutual funds, though, and you are still eligible to receive returns like dividends or capital gains even with the lien in place. While you maintain complete ownership over the loan until repayment, the lien just serves as a protection for the lender, guaranteeing that they can reclaim the money if necessary. Apart from this, there are three key points to keep in mind about a LAMF:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Cheaper than personal loans</strong>: These are often cheaper than personal loans because they are backed by your mutual fund holdings as collateral, hence reducing the risk for the lender.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Limit on funds</strong>: The amount of money you can borrow depends on the bank or financial institution you decide to borrow from, as well as how the bank assesses your mutual fund portfolio. The net asset value (NAV) of your mutual funds and the type of funds you have invested in are typically assessed by the lenders. They give loans against a specific proportion of the NAV, considering this assessment.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Continue to earn returns on your holdings</strong>: Even after you offer your mutual funds as collateral, they continue to be invested in the market. This means that any appreciation of funds, you will still directly benefit from it.&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Loan_Against_SIP_%E2%80%93_Is_It_Possible"></span>Loan Against SIP – Is It Possible?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>It is indeed a possibility to take a loan against an SIP. It&#8217;s interesting to note that you can access your SIP investments whenever you need money. By using the mutual fund units you&#8217;ve accrued through SIP investments as collateral, you can obtain a loan through the SIP. The ability to obtain funding without needing to sell your assets is the technique&#8217;s greatest benefit.&nbsp;</p>



<p>When you choose a SIP loan, you supply the lender your mutual fund units, and after evaluating their value, the lender makes a loan offer based on a percentage of those units, usually between 50% and 70%. Even while you pay back the loan using flexible repayment options, your SIP investments keep growing without interfering with your plans to accumulate wealth. A loan against an SIP comes with many benefits, like quick access to money, lower interest rates, interest is paid only on the used amount, it is flexible to repay, great for short-term needs, and of course, your investment&#8217;s growth isn’t affected.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Interest_Rates_on_Loan_Against_Mutual_Funds"></span>Interest Rates on Loan Against Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Different banks/NBFCs have varying interest rates and fees. Below is a <a href="https://www.paisabazaar.com/loan-against-securities/mutual-funds/" target="_blank" rel="noreferrer noopener">summary</a> of the interest rates that certain banks offer.&nbsp;</p>



<figure class="wp-block-table"><table><tbody><tr><td>Bank&nbsp;</td><td>Interest Rates (p.a.)&nbsp;</td></tr><tr><td>State Bank of India&nbsp;</td><td>10.5 %&nbsp;</td></tr><tr><td>Bajaj Finance&nbsp;</td><td>Up to 20 %&nbsp;</td></tr><tr><td>Tata Capital&nbsp;</td><td>8%-20 %&nbsp;</td></tr><tr><td>Axis Bank&nbsp;</td><td>11.49%-13.75%&nbsp;</td></tr><tr><td>Canara Bank&nbsp;</td><td>15.80%&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_to_Get_a_Loan_Against_Mutual_Funds"></span>How to Get a Loan Against Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>There is a set process you need to follow to apply for a loan against your mutual funds. Let’s break that process down.&nbsp;</p>



<ol class="wp-block-list" start="1">
<li><strong>Assess the NAV of mutual funds</strong>: Understanding the NAV will help you check if your mutual fund holdings are eligible for a loan or not.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="2">
<li><strong>Pick a lender</strong>: Choose between various financial institutions or banks, whichever works best for you in terms of loan terms, interest rates, and loan disbursements.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="3">
<li><strong>Complete the application</strong>: Fill out the application form along with any required documents like mutual fund account statement, identity proof, and address proof, on the lender&#8217;s online portal or at the bank branch.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="4">
<li><strong>Disbursement of funds</strong>: The loan amount will be disbursed or released in a few days once all paperwork is in order, the lender accepts your application, and you pledge your mutual fund units.&nbsp;</li>
</ol>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Advantages_and_Risks_of_Borrowing_Against_Mutual_Funds"></span>Advantages and Risks of Borrowing Against Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Before you decide to take a loan against your mutual fund investments, you need to understand the pros and cons of doing so. You need to understand how it could affect your investment, and anything to keep watch for.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Advantages_of_Borrowing_Against_Mutual_Funds"></span>Advantages of Borrowing Against Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li><strong>Quick and easy access to funds</strong>: One of the primary perks of this process is the ability to access funds quickly and easily. By pledging mutual fund units and establishing an overdraft limit, the loan can be obtained immediately. This term loan is a hybrid. When compared to conventional loan processing, this saves time.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Flexible interest payment</strong>: The loan account must be credited each month to cover interest. However, interest is only assessed on the loan amount that is used, not the total amount that has been approved. Because of this, the interest rate is flexible.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Faster availability than other loans</strong>: Unlike other loans, which have longer waiting periods, money from a loan secured by mutual funds can be credited in as little as one day, making it perfect for urgent situations.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Lower interest rates</strong>: Compared to other loan options like credit cards and personal loans, the interest rate on the loan secured by mutual funds is lower. As a result, EMIs are reduced, and they are more affordable.&nbsp;</li>
</ul>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Risks_of_Borrowing_Against_Mutual_Funds"></span>Risks of Borrowing Against Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li><strong>Interest costs</strong>: Interest rates that you must pay can drastically affect your returns.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Liquidity risk</strong>: If the NAV goes down significantly, lenders could restrict withdrawals or ask you to sell your units.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Tax implications</strong>: Borrowing does not result in capital gains tax, unlike selling, but not repaying can lead to forced redemptions and tax obligations.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Limited eligibility</strong>: Only debt/hybrid funds and large-cap equity funds are eligible; small-cap or sectoral funds are rarely recognized.&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>In essence, you can borrow money when you need it by using your assets in mutual funds as collateral. However, keep in mind that to receive your mutual funds back and keep holding or redeeming them without incurring further fees, you must repay the loan in full. This loan should only be used if you need the money immediately for any expenses; it should not be used for speculative or risky investments like stock market trading.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="How_much_loan_can_I_get_against_my_mutual_fund_holdings"></span>How much loan can I get against my mutual fund holdings?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>If you meet the eligibility criteria, you can borrow up to 70% of the mutual fund’s net asset value, depending on the type of the fund. NAV stability is used by lenders, such as banks and NBFCs, to impose limitations. Verify the terms; some limit withdrawals until they are paid back.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_documents_are_needed_to_apply_for_a_loan_on_a_mutual_fund"></span>What documents are needed to apply for a loan on a mutual fund?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>You need to submit the following documents to avail a loan against mutual funds to avail a loan against mutual funds: PAN Card, address proof, identity proof, and verification of signature.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Are_SIP_mutual_funds_eligible_for_loans"></span>Are SIP mutual funds eligible for loans?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Yes, SIP holdings are eligible for loans if they meet the following criteria: they are debt/hybrid or large-cap equity funds, they have completed the 1-year lock-in, and they meet the lender&#8217;s LTV ratio of around 50% to 70%.&nbsp;&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_is_the_interest_rate_range_for_a_loan_against_mutual_fund_units"></span>What is the interest rate range for a loan against mutual fund units?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>A loan secured by mutual funds typically has an interest rate between 9% and 15%. Depending on the bank or NBFC, the loan amount may be as low as Rs 25,000 or as high as Rs 5 crore.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Is_there_any_risk_in_taking_a_loan_against_mutual_funds"></span>Is there any risk in taking a loan against mutual funds?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Risks associated with taking out a loan against mutual funds include forced redemptions with tax consequences, high interest rates (9–15%), limited access to pledged units, and margin calls if the NAV declines. The expenses and volatility concerns make it less appropriate for long-term requirements, even while it is helpful for short-term liquidity.  Before taking out a loan, always evaluate your ability to repay.&nbsp;</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Is_a_Loan_Against_Mutual_Funds" >What Is a Loan Against Mutual Funds?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#How_Does_a_Loan_on_a_Mutual_Fund_Work" >How Does a Loan on a Mutual Fund Work?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Loan_Against_SIP_%E2%80%93_Is_It_Possible" >Loan Against SIP – Is It Possible?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Interest_Rates_on_Loan_Against_Mutual_Funds" >Interest Rates on Loan Against Mutual Funds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#How_to_Get_a_Loan_Against_Mutual_Funds" >How to Get a Loan Against Mutual Funds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Advantages_and_Risks_of_Borrowing_Against_Mutual_Funds" >Advantages and Risks of Borrowing Against Mutual Funds&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-7" href="#Advantages_of_Borrowing_Against_Mutual_Funds" >Advantages of Borrowing Against Mutual Funds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-8" href="#Risks_of_Borrowing_Against_Mutual_Funds" >Risks of Borrowing Against Mutual Funds&nbsp;</a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Conclusion" >Conclusion&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#FAQs" >FAQs&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-11" href="#How_much_loan_can_I_get_against_my_mutual_fund_holdings" >How much loan can I get against my mutual fund holdings?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#What_documents_are_needed_to_apply_for_a_loan_on_a_mutual_fund" >What documents are needed to apply for a loan on a mutual fund?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-13" href="#Are_SIP_mutual_funds_eligible_for_loans" >Are SIP mutual funds eligible for loans?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-14" href="#What_is_the_interest_rate_range_for_a_loan_against_mutual_fund_units" >What is the interest rate range for a loan against mutual fund units?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-15" href="#Is_there_any_risk_in_taking_a_loan_against_mutual_funds" >Is there any risk in taking a loan against mutual funds?&nbsp;</a></li></ul></li></ul></nav></div>


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What Is a Loan Against Mutual Funds? Everything You Need to Know 


<p>Hybrid mutual funds are one of the most versatile investing options that help you spread your funds over many asset classes, including stocks, bonds, gold, or maybe even real estate. They are broadly classified into three categories: balanced advantage funds, aggressive hybrid funds, and multi asset allocation funds, each of which works with an exclusive risk appetite. Hybrid funds are ideal for you if you are looking for a mix of risks and returns. They provide diversification, active risk management, and are particularly well-suited for your long-term goals. In everyday life, they are effective for goals such as retirement planning, saving for your child&#8217;s education, and steadily accumulating wealth with moderate risk.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Hybrid_Mutual_Fund_Meaning_A_Simple_Explanation"></span>Hybrid Mutual Fund Meaning: A Simple Explanation&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>If you are looking for a smarter approach to diversify your portfolio, then hybrid mutual funds allow you to do that by combining different asset types into a single investment. Consider them a financial smoothie, blending in the growth potential of stocks (equity) with the stability of fixed-income instruments such as bonds and treasury bills (T-Bills). Some hybrid funds even comprise of other assets for further diversification. These funds provide a single solution for those seeking balanced growth, consistent income, or even lower risk. Hybrid funds are based on three key investment principles: the allocation of assets, correlation, and diversification. Here&#8217;s how they work for you:&nbsp;</p>



<ol class="wp-block-list" start="1">
<li><strong>Asset allocation</strong>: This requires strategically allocating your money across several asset classes (such as stocks, bonds, and commodities) to balance risk and reward.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="2">
<li><strong>Correlation</strong>: Since these assets do not always move in sync (some rise and some fall), your portfolio stays stable.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="3">
<li><strong>Portfolio diversification</strong>: Holding various assets prevents overexposure to a single risk, smoothing out the investment trip.&nbsp;</li>
</ol>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Types_of_Hybrid_Mutual_Funds_Explained"></span>Types of Hybrid Mutual Funds Explained&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Hybrid mutual funds come in many different varieties, such as:&nbsp;</p>



<ol class="wp-block-list" start="1">
<li><strong>Multi asset allocation fund</strong>: These funds need investments in at least three asset classes, with a minimum of 10% in each. These funds expose you to invest in a wider range of asset classes, with asset allocation determined by the fund manager.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="2">
<li><strong>Aggressive hybrid funds</strong>: These schemes are required to invest at least 65 percent and up to 80 percent in the equity asset class and 20 to 35 percent in the debt asset class. They offer the opportunity of significant returns at low risk due to the limited allocation to debt. They benefit from the levy that applies to equity-oriented programs.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="3">
<li><strong>Conservative hybrid funds</strong>: These schemes are designed to offer a balanced approach by investing 10% to 25% of their total assets in equity and equity-related instruments, while allocating the remaining 75% to 90% to debt securities. The primary objective is to generate stable income through the debt portion, while the equity component adds potential for higher returns. This category is ideal for investors seeking better returns than pure debt funds and are willing to take on slightly higher risk for that added growth potential.&nbsp;</li>
</ol>



<ol class="wp-block-list" start="4">
<li><strong>Equity savings funds</strong>: These funds aim to balance risk and return by investing in stock, derivatives, and debt. Derivatives limit directional stock exposure, which reduces volatility and generates consistent returns. Equity assets give growth and debt, while derivatives provide regular, predictable returns. These funds invest 65–100% in equity assets and 0–35% in debt asset classes.&nbsp;</li>
</ol>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Hybrid_Funds_in_India_Market_Overview"></span>Hybrid Funds in India: Market Overview&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Here is a list of the five best-performing hybrid funds in India as of <a href="https://www.etmoney.com/mutual-funds/hybrid" target="_blank" rel="noreferrer noopener">2024</a>:&nbsp;</p>



<figure class="wp-block-table"><table><tbody><tr><td>Scheme Name&nbsp;</td><td>Expense Ratio&nbsp;</td><td>3-Year Returns&nbsp;</td></tr><tr><td>JM Aggressive Hybrid Fund&nbsp;</td><td>0.56%&nbsp;</td><td>27.1% p.a.&nbsp;</td></tr><tr><td>Quant Multi Asset Fund&nbsp;</td><td>0.6%&nbsp;</td><td>26.82% p.a.&nbsp;</td></tr><tr><td>Bank of India Mid &amp; Small Cap Equity &amp; Debt Fund&nbsp;</td><td>0.87%&nbsp;</td><td>25.56% p.a.&nbsp;</td></tr><tr><td>ICICI Prudential Retirement Fund &#8211; Hybrid Aggressive Plan&nbsp;</td><td>0.81%&nbsp;</td><td>24.99% p.a.&nbsp;</td></tr><tr><td>HDFC Balanced Advantage Fund&nbsp;</td><td>0.77%&nbsp;</td><td>24.36% p.a.&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Hybrid_Funds_vs_Balanced_Funds_Key_Differences"></span>Hybrid Funds vs Balanced Funds: Key Differences&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>The primary difference between hybrid mutual funds and balanced funds is how they allocate their assets. Hybrid funds invest in a combination of equity and debt. However, balanced funds dynamically modify their asset allocation in response to market conditions, whilst standard hybrid funds keep a relatively stable allocation.&nbsp;</p>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Parameter</strong>&nbsp;</td><td><strong>Hybrid Fund</strong>&nbsp;</td><td><strong>Balanced Fund</strong>&nbsp;</td></tr><tr><td><strong>Asset allocation</strong>&nbsp;</td><td>No fixed ratio; varies based on the market circumstances &amp; fund manager.&nbsp;</td><td>Fixed ratio (For example, 60% equity plus 40% debt).&nbsp;</td></tr><tr><td><strong>Rebalancing</strong>&nbsp;</td><td>Adjustments are flexible based on market opportunities.&nbsp;</td><td>Rebalanced when deviates from predefined ratio (For example, 60:40).&nbsp;</td></tr><tr><td><strong>Objective</strong>&nbsp;</td><td>Growth and income generation with lively asset allocation.&nbsp;</td><td>Focuses on stability using a fixed equity-debt split.&nbsp;</td></tr><tr><td><strong>Returns</strong>&nbsp;</td><td>Potentially higher in bull markets (aggressive equity shifts).&nbsp;</td><td>Moderate, steady returns because of fixed allocation.&nbsp;</td></tr><tr><td><strong>Risk</strong>&nbsp;</td><td>Varies (higher if equity-heavy, and lower if debt-heavy).&nbsp;</td><td>Balanced (controlled equity exposure).&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_Do_Hybrid_Mutual_Funds_Generate_Returns"></span>How Do Hybrid Mutual Funds Generate Returns?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Hybrid funds try to create profits in the short term, whereas in the long-term, they focus on capital appreciation while maintaining a balanced portfolio. Fund managers allocate your money in varied amounts between equities and debt, depending on your investment goal. The fund manager can swap securities to profit from ongoing market movements.&nbsp;</p>



<p>Hybrid mutual funds generate profits for you by intelligently combining the growth potential of equity with the stability of debt instruments &#8211; all in one investment. Here&#8217;s how they work in the market: &nbsp;<br>&nbsp;<br>When the stock market rises, the equity element increases your returns, precisely like a pure equity fund. Meanwhile, the debt part serves as a soft cushion during market downturns, offering steady interest income and minimizing the volatility. Fund managers actively adjust reservations, shifting more into equities during optimistic periods (such as when the Sensex rises) and switching to safer debt during crashes.&nbsp;</p>



<p>Some hybrid funds (such as aggressive hybrid funds) may invest a small amount of their assets in gold or other such assets to diversify. Another advantage is that taxes are more efficient. If the fund has over 65% exposure to equity, long-term gains are taxed at only 12.5% (above ₹1.25 lakh), making it a tax-smart choice compared to other fixed income investments, like FDs.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Who_Should_Invest_in_Hybrid_Mutual_Funds"></span>Who Should Invest in Hybrid Mutual Funds?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>If you&#8217;re an investor who wants to grow without worrying about market crashes, hybrid mutual funds could be your investment avenue. These funds are tailored to your needs if:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>You seek balanced growth</strong>: You seek growth that is neither too aggressive like pure equities nor too conservative like FDs, just balanced. Perfect for that sweet spot in which your money expands consistently while also remaining safe.&nbsp;&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>You are a first-time investor</strong>: If you are new to mutual funds, hybrid fund’s work a lot like training wheels, providing equity exposure while cushioning your falls with debt.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>You are saving for mid-term goals (3-7 years)</strong>: If you are planning a dream vacation, a home down payment, or your child&#8217;s education, the equity-debt mix allows your corpus to expand faster than FDs while lowering risk.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>You want tax-efficiency</strong>: Hybrid funds, with equity taxation benefits (12.5% LTCG after ₹1.25 lakh), can outdo typical debt options post-tax, particularly in the 30% tax bracket.&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Tax_Implications_on_Hybrid_Mutual_Funds"></span>Tax Implications on Hybrid Mutual Funds&nbsp;<span class="ez-toc-section-end"></span></h2>



<ol class="wp-block-list" start="1">
<li><strong>Equity-Oriented Hybrid Funds (&gt;65% Equity)</strong>&nbsp;</li>
</ol>



<p>If your hybrid fund invests 65% or more in equities, it is taxed as an equity fund. If you are selling within one year, the gains are taxed at 20%, whereas, if you plan on holding for more than a year, the gains beyond ₹1.25 lakh per year are taxed at 12.5%. This makes them perfect to accumulate long-term wealth in higher tax bands.&nbsp;</p>



<ol class="wp-block-list" start="2">
<li><strong>Debt-Oriented Hybrid Funds (&lt;65% equity)</strong>&nbsp;</li>
</ol>



<p>If equity exposure is lesser than 65%, debt fund tax rules are applicable. Capital gains in this case are taxed as per the applicable income tax slab rates, regardless of the holding period. Additionally, any interest earned will also be subject to taxation based on your individual tax slab.&nbsp;</p>



<ol class="wp-block-list" start="3">
<li><strong>Dividend Taxation</strong>&nbsp;</li>
</ol>



<p>Dividends on hybrid mutual funds are taxed based on your income bracket. For people in the 30% group, growth alternatives like capital gains are more appealing than dividend payouts.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Hybrid mutual funds bring together the stability of debt and the potential of stocks to give you an intelligent and flexible investing option. These funds offer a variety of options to suit varying investment objectives, risk tolerances, and time horizons, ranging from conservative to aggressive. Hybrid funds can be a great starting step towards building wealth, regardless of your level of experience with investing or your desire for a well-rounded, tax efficient strategy. They are a good option for you if you are looking to create a robust portfolio for both short and long-term financial objectives because of their dynamic asset allocation, diversification, and risk-adjusted returns.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs&nbsp;<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_is_the_difference_between_hybrid_and_balanced_mutual_funds"></span>What is the difference between hybrid and balanced mutual funds?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>The primary areas of difference between hybrid and balanced funds are risk and strategy. Balanced funds, which offer lower risk and steady income are perfect for conservative investors investing 60% in stocks and the remaining portion in debt. Conversely, hybrid funds make sense for investors with a modest tolerance for risk because they don&#8217;t have a set allocation and fluctuate along with the market. Both are subject to taxes based on equity exposure; hybrid funds are slightly riskier but offer greater flexibility.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Are_hybrid_mutual_funds_safe_for_beginners"></span>Are hybrid mutual funds safe for beginners?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Hybrid mutual funds are known to be riskier investments in comparison to debt funds however they are still safer than pure equity funds. These funds are more likely to offer superior returns in comparison to debt funds and are popular among several low-risk investors, so they essentially are suitable for beginners.&nbsp;</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#Hybrid_Mutual_Fund_Meaning_A_Simple_Explanation" >Hybrid Mutual Fund Meaning: A Simple Explanation&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#Types_of_Hybrid_Mutual_Funds_Explained" >Types of Hybrid Mutual Funds Explained&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Hybrid_Funds_in_India_Market_Overview" >Hybrid Funds in India: Market Overview&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Hybrid_Funds_vs_Balanced_Funds_Key_Differences" >Hybrid Funds vs Balanced Funds: Key Differences&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#How_Do_Hybrid_Mutual_Funds_Generate_Returns" >How Do Hybrid Mutual Funds Generate Returns?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Who_Should_Invest_in_Hybrid_Mutual_Funds" >Who Should Invest in Hybrid Mutual Funds?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Tax_Implications_on_Hybrid_Mutual_Funds" >Tax Implications on Hybrid Mutual Funds&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Conclusion" >Conclusion&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#FAQs" >FAQs&nbsp;</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-10" href="#What_is_the_difference_between_hybrid_and_balanced_mutual_funds" >What is the difference between hybrid and balanced mutual funds?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-11" href="#Are_hybrid_mutual_funds_safe_for_beginners" >Are hybrid mutual funds safe for beginners?&nbsp;</a></li></ul></li></ul></nav></div>


Blog banner for What is a Hybrid Mutual Fund? Meaning, Types & Returns Explained

What is a Hybrid Mutual Fund? Types, Returns & More  


<p>When you&#8217;re evaluating mutual funds or investment portfolios, one crucial metric you&#8217;ll encounter is the portfolio turnover ratio. This tells you how frequently a fund buys and sells securities within a year, and it has real implications for your returns, your taxes, and understanding a fund’s strategy.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Portfolio_Turnover_Ratio"></span>What is Portfolio Turnover Ratio?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>The portfolio turnover ratio measures the percentage of a fund’s holdings that are replaced &#8211; or “turned over” &#8211; during a defined period, usually 12 months or one calendar year. If a fund has a turnover ratio of 50%, that means half of its investments were bought or sold in the past year.&nbsp;</p>



<p>In other words, it defines how actively a fund is managed:&nbsp;</p>



<ul class="wp-block-list">
<li>Low turnover = buy-and-hold strategy&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>High turnover = Frequent trading and active management&nbsp;&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Why_Portfolio_Turnover_Ratio_Matters_in_Mutual_Fund_Evaluation"></span>Why Portfolio Turnover Ratio Matters in Mutual Fund Evaluation&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>This ratio matters because it directly affects your costs and investment behavior:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Transaction costs</strong>: Every buy or sell suffers brokerage, transaction, and other charges. Higher turnover ratio → higher costs → lower net returns.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Tax efficiency</strong>: Frequent trades can generate short-term capital gains, which are taxed at higher rates than long-term gains, making high-turnover funds less tax-efficient.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Investment philosophy insight</strong>: A low portfolio turnover ratio suggests a steady, long-term approach, and a higher ratio indicates active efforts to profit from market opportunities.&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Portfolio_Turnover_Ratio_Formula_How_to_Calculate_It"></span>Portfolio Turnover Ratio Formula &amp; How to Calculate It&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Here’s how you can calculate this important ratio yourself:&nbsp;</p>



<p>Portfolio Turnover Ratio (%) = (Lesser of total purchases or total sales during period)&nbsp;&nbsp;&nbsp;</p>



<p>&nbsp; ÷ (Average net assets during the same period) × 100&nbsp;</p>



<p>For instance, if a fund buys ₹50 crore and sells ₹40 crore worth of securities in a year, and its average assets are ₹100 crore:&nbsp;</p>



<p>Turnover = ₹40 Cr ÷ ₹100 Cr × 100 = <em>40%</em>&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Portfolio_Turnover_Ratio_Example_Real-Life_Illustration"></span>Portfolio Turnover Ratio Example: Real-Life Illustration&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Let’s say:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Fund A</strong> bought ₹100 Cr, sold ₹80 Cr; average assets ₹500 Cr&nbsp;<br>→ Turnover = min (100, 80) ÷ 500 =&nbsp; 80 ÷ 500 = 16%.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li><strong>Fund B</strong> bought ₹620 Cr, sold ₹730 Cr; average assets ₹1,200 Cr&nbsp;<br>→ Turnover = min (620, 730) ÷ 1,200 = 620÷1200 = 51.7%&nbsp;&nbsp;</li>
</ul>



<p>These examples reveal that Fund A takes a more patient, long-term attitude, while Fund B trades far more aggressively within the same year.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="High_vs_Low_Portfolio_Turnover_Pros_and_Cons"></span>High vs Low Portfolio Turnover: Pros and Cons&nbsp;<span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table><tbody><tr><td>Turnover Level&nbsp;</td><td>Pros&nbsp;</td><td>Cons&nbsp;</td></tr><tr><td>Low (&lt;30–50%)&nbsp;</td><td>Lower costs &amp; taxes; aligned with passive funds; more tax-efficient&nbsp;&nbsp;</td><td>May miss out on short-term opportunities; slower rebalancing&nbsp;</td></tr><tr><td>High (&gt;100%)&nbsp;</td><td>Can capitalize on market trends; may generate alpha in the short term&nbsp;&nbsp;</td><td>Higher trading &amp; tax costs may indicate “churning”- trading for commissions&nbsp;&nbsp;</td></tr></tbody></table></figure>



<p>Importantly, a high ratio doesn’t always hurt returns, if the fund manager consistently outpaces the benchmark after costs, it could still be worthwhile. That said, excessive turnover accompanied by dull performance is a warning sign.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_the_Ideal_Portfolio_Turnover_Ratio"></span>What is the Ideal Portfolio Turnover Ratio?&nbsp;<span class="ez-toc-section-end"></span></h2>



<ul class="wp-block-list">
<li>Index or passive funds: Look for 0–30%; anything above 30% indicates a sense of inefficiency.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Actively managed funds: Ratios between 50% and 150% can be justified, but only if performance compensates for the costs that you incur.&nbsp;</li>
</ul>



<p>The “ideal” ratio depends on your goals.&nbsp;</p>



<ul class="wp-block-list">
<li>Want low cost and simplicity? opt for turnover of &lt;50%.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Prefer active strategies? Accept higher turnover but verify if the returns are worthwhile.&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>In conclusion, the portfolio turnover ratio is a vital indicator of how actively a fund is managed and how frequently its holdings change over time. While a low turnover ratio often signals a stable, cost-efficient, and tax-friendly investment approach, a high turnover can suggest an aggressive strategy aiming to capitalize on market opportunities. However, higher activity also comes with increased costs and potential tax implications. As an investor, understanding this ratio helps you align your investment choices with your financial goals, risk appetite, and preference for active or passive fund management. Always evaluate turnover alongside fund performance, expenses, and consistency to make informed decisions.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs"></span>FAQs<span class="ez-toc-section-end"></span></h2>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="What_is_a_good_portfolio_turnover_ratio_in_mutual_funds"></span>What is a good portfolio turnover ratio in mutual funds?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>For passive funds, near 0–30% is ideal. For active funds, up to 100–150% may be acceptable, provided you see risk-adjusted outperformance.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="How_do_you_calculate_the_portfolio_turnover_ratio"></span>How do you calculate the portfolio turnover ratio?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Divide the lesser of total securities purchased or sold by the fund’s average net assets, then multiply by 100 for a percentage.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Does_a_high_turnover_ratio_mean_a_fund_is_actively_managed"></span>Does a high turnover ratio mean a fund is actively managed?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Yes. A high turnover typically indicates active trading, aiming to exploit market moves.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="How_does_turnover_ratio_affect_fund_returns_and_cost"></span>How does turnover ratio affect fund returns and cost?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Higher turnover raises both transaction costs and tax liabilities, and since these aren’t included in the expense ratio, they reduce your real returns.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Is_a_lower_portfolio_turnover_ratio_always_better"></span>Is a lower portfolio turnover ratio always better?&nbsp;<span class="ez-toc-section-end"></span></h3>



<p>Not necessarily. Lower turnover is more cost-effective but may miss market opportunities. Higher turnover can be beneficial only if the after-cost risk-adjusted return justifies it.&nbsp;</p>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_is_Portfolio_Turnover_Ratio" >What is Portfolio Turnover Ratio?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#Why_Portfolio_Turnover_Ratio_Matters_in_Mutual_Fund_Evaluation" >Why Portfolio Turnover Ratio Matters in Mutual Fund Evaluation&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Portfolio_Turnover_Ratio_Formula_How_to_Calculate_It" >Portfolio Turnover Ratio Formula &amp; How to Calculate It&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Portfolio_Turnover_Ratio_Example_Real-Life_Illustration" >Portfolio Turnover Ratio Example: Real-Life Illustration&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#High_vs_Low_Portfolio_Turnover_Pros_and_Cons" >High vs Low Portfolio Turnover: Pros and Cons&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#What_is_the_Ideal_Portfolio_Turnover_Ratio" >What is the Ideal Portfolio Turnover Ratio?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Conclusion" >Conclusion&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#FAQs" >FAQs</a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-9" href="#What_is_a_good_portfolio_turnover_ratio_in_mutual_funds" >What is a good portfolio turnover ratio in mutual funds?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-10" href="#How_do_you_calculate_the_portfolio_turnover_ratio" >How do you calculate the portfolio turnover ratio?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-11" href="#Does_a_high_turnover_ratio_mean_a_fund_is_actively_managed" >Does a high turnover ratio mean a fund is actively managed?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-12" href="#How_does_turnover_ratio_affect_fund_returns_and_cost" >How does turnover ratio affect fund returns and cost?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-13" href="#Is_a_lower_portfolio_turnover_ratio_always_better" >Is a lower portfolio turnover ratio always better?&nbsp;</a></li></ul></li></ul></nav></div>


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