Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. The Asset Management Company (AMC), i.e. the company which manages the mutual fund raises money from the public. The AMC then deploys the money by investing in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund.
The Asset Management Company (AMC), i.e. the company which manages the mutual fund raises money from the public. The AMC then deploys the money by investing in different financial securities like stocks, bonds etc. The securities are selected keeping in mind the investment objective of the fund. For example, if the investment objective of the fund is capital appreciation, the fund will invest in shares of different companies. If the investment objective of the fund is to generate income, then the fund will invest in fixed income securities that pay interest.
Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund. On an on-going basis, the fund managers will manage the fund to ensure that the investment objectives are met. For the services the AMCs provide to the investors, they incur expenses and charge a fee to the unit holders. These expenses are charged proportionately against the assets of the fund and are adjusted in the price of the unit. Mutual funds are bought or sold on the basis of Net Asset Value (NAV). Unlike share prices which changes constantly depending on the activity in the share market, the NAV is determined on a daily basis, computed at the end of the day based on closing price of all the securities that the mutual fund holds in its portfolio.
There are essentially two kinds of Mutual Funds.
Open Ended Schemes: Investors can buy units of open-ended schemes at any time. Investors can also sell units of open-ended schemes at any time, though some schemes (e.g. equity linked savings schemes) may have a lock in period during which the investor cannot sell the units. The percentage ownership of investors in the assets of open-ended schemes changes whenever investors purchase or sell units. Since you can sell units of open-ended schemes at any time, high liquidity is ensured to the investors. However, costs may apply if you sell units of open-ended scheme before a certain period of time from the date of investment. We will discuss this in more details later.
Close Ended Schemes: Close ended schemes are open for subscription only for a limited period of time, during the offer period. These schemes have fixed tenure, and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the investors can switch to a different scheme. Close ended schemes are open for subscription only for a limited period of time, during the new fund offer (NFO) period. These schemes have fixed tenure, and the investors can sell or redeem only after the maturity of the scheme. Upon maturity, depending on the scheme, the units get automatically redeemed or in some cases, the AMC gives option to unit holders to switch to a different scheme. The percentage ownership of investors in the assets of close ended schemes is unchanged throughout the tenure of the scheme as new investors cannot buy units post closure of the NFO. Some close ended schemes are listed on stock exchanges, and you can buy or sell them through your share trading / demat account in the stock exchange, but the liquidity of these schemes listed on the exchanges may be low.
There are 5 key advantages of investing in mutual funds:-
Risk Diversification:Mutual funds help investors diversify their risks by investing in a portfolio of stocks and other securities across different sectors, companies and market capitalizations. A diversified portfolio reduces risks associated with individual stocks or other assets or specific sectors. If an equity investor were to create a well-diversified portfolio by directly investing in stocks it would require a large investment. On the other hand, mutual fund investors can buy units of equity mutual funds with an investment of as low as Rs 5,000/- only. Mutual funds are managed by professional fund managers who are experts in picking the right stocks to get the best risk adjusted returns. A common investor often lacks this expertise and thus should invest through the mutual fund route.
Economies of scale in transaction costs: Since mutual funds buy and sell securities in large volumes, transaction costs on a per unit basis is much lower than buying or selling stocks directly by an individual investor.
Tax efficiency: Mutual funds, whose average equity allocation (i.e. where underlying assets are equity and equity related securities) is 65% or more, are treated as equity funds from tax perspective. These include all equity funds and also several hybrid fund categories. Short term capital gains (investment holding period of less than 12 months) in equity funds are taxed at 20%. Long term capital gains (investment holding period of more than 12 months) in equity funds are tax free up to Rs 125,000 in a financial year and taxed at 12.5% thereafter.
With regards to Debt funds, short term capital gains (investment holding period of less than 36 months) in non-equity funds are taxed as per the income tax rate of the investor. Long term capital gains (investment holding period of more than 36 months) in non-equity funds are taxed at 20% after allowing for indexation for investments made prior to 1st April 2023. However, following the Amendment to Finance Bill 2023, the indexation benefit on debt mutual funds has been withdrawn. Debt funds will now be taxed at investor's tax slab rate. These changes bring taxation of debt and debt oriented mutual funds at par with fixed deposits for investments made from 1st April 2023 onward.
Other mutual funds including schemes with equity allocation between 35 - 65% and schemes of asset classes other than equity and debt, e.g. commodities, international etc have long term capital gains taxation holding period of 2 years. Short term capital gains are taxed at investor's tax slab rate, while long term capital gains are taxed at 12.5% (no indexation is allowed in this case).
Investments in mutual fund Equity Linked Savings Schemes (ELSS) up to Rs 150,000 in a financial year qualify for deductions under Section 80C of The Income Tax Act 1961.
High Liquidity:Open-ended mutual funds are more liquid than many other investment products like shares, debentures and variety of deposit products (excluding bank fixed deposits). Investors can redeem their units fully or partially at any time in open-ended funds at applicable Net Asset Values (NAVs). Moreover, the procedure of redemption is standardized across all mutual funds.
Variety of products and modes of investment:: Mutual funds offer investors a variety of products to suit their risk profiles and investment objectives. Apart from equity funds, there are debt funds, hybrid funds, solution-oriented funds (e.g. childrens funds, retirement funds), international funds etc. Mutual funds can provide exposure to different asset classes e.g. equity, fixed income, commodities (e.g. gold, silver) and international equities. Investors can opt for different investment modes like lumpsum (one time investment), systematic investment plans (SIP), systematic transfer plans or STP (from other mutual fund scheme to the other in the same AMC) or switching from one scheme to the another.
Units are the building blocks of a mutual fund scheme. A unit represents percentage ownership of the total pool of money managed by the Asset Management Company. Generally, Mutual fund units are priced at Rs 10 at the time of launch (known as New Fund Offer or NFO) of the scheme and its price fluctuates with change in value of the assets of the scheme.
Suppose you have invested Rs 100,000 in a mutual fund. If the price of a unit of the fund is Rs 10, then the mutual fund house will allot you 10,000 units. Let us assume the total money invested in the fund by all the investors is Rs 100 Crores. The mutual fund invests the money to buy equity or fixed income securities. Each unit will represent 0.000001% value of all the securities the mutual fund has in its holdings. If you have 10,000 units, then your portion of the mutual fund holdings will be 0.01%.
As the value of portfolio of securities held by the mutual increases or decreases, so will the price of the units. If the value of assets increases from Rs 100 Crores to Rs 110 Crores, without the issue of new units, the price of the unit will be Rs 11 (0.000001% X 110 Crores). Please note that the percentage ownership represented by unit of the total assets of a scheme will change from time to time as new investors invest in the scheme or existing investors exit (redeem) from the scheme.
Mutual funds are bought or sold on the basis of Net Asset Value (NAV). NAV is essentially the price of a unit. NAV is calculated by dividing the net assets (market value of the securities and cash held by the fund minus the liabilities) of the fund by the total number of units outstanding. Unlike share prices which changes constantly during the day depending on the activity in the share market, the NAV is determined on a daily basis, computed at the end of the day based on closing price of all the securities that the mutual fund owns after making appropriate adjustments.
Contrary to popular misconception, schemes with high NAVs are not overpriced and funds with low NAVs are not attractively priced. Older the fund higher will be the NAV over a period of time. Low or high, the NAV by itself does not impact the return on investment from the mutual fund. The percentage change in a fund's NAV over a period of time denotes the percentage returns on investment of all the unit holders of the fund over the same period.
Expense ratio is the annual cost incurred by the AMC to operate a mutual fund scheme, expressed as a percentage of the total assets of the scheme. The cost includes fund manager expense, cost of the supporting infrastructure for the fund manager, transaction costs (for buying and selling securities), marketing and distribution costs (commissions paid to mutual fund distributors). If the total assets under management of a scheme is Rs 500 crores and the expense ratio is 1.5%, then it implies that, Rs 7.5 crores (1.5% X 500 crores) is the operating expenses of the scheme. This expense is deducted from the asset value of the scheme on a pro-rata basis; units are priced after deducting expense ratio. Investors should note that, the NAV of a scheme is net of the expense ratio. Expense ratios of different schemes and plans of the same AMC may be different.
Mutual funds have traditionally been distributed through MF distributors in India. MF distributors mandatorily need to have certification from AMFI (the nodal body of mutual funds in India) to ensure that they have sufficient knowledge to give investment advice to investors. Apart from investment advice, MF distributors also help investors with fulfilment of their purchase or redemption transactions (fulfilling KYC requirements, filling application forms and submission to AMCs or mutual fund registrars), as well as ongoing customer service. For their services, MF distributors get commissions from the AMC. If you make your mutual fund investment through a MF distributor, you will invest in, what is known as, regular plan of the scheme.
Some years back, investors were also provided with the option of investing directly with the AMC, without going through a MF distributor. If you submit your mutual fund investment application directly to the AMC (online or offline), you will invest in, what is known as, direct plan of the scheme. The most obvious difference between regular and direct plan is that, unlike in a regular plan, you need to have capability to decide which scheme to invest in and how to manage your investment on an ongoing basis. You will also have to devote time and effort to fulfil the transaction by yourself by providing necessary documents for KYC, filling up forms and visiting the AMC (online or offline). The advantage of direct plan versus regular plan is in the expense ratio. Since in direct plans, AMCs do not have to pay commissions to the MF distributors, the expense ratio is lower. Hence, the returns are higher.
AMCs may charge a fee if you redeem (sell) your units within a specified period from the date of investment. This fee is known as exit load. Let us understand exit load with the help of an example. Suppose you invested Rs 1,00,000 lakh in a scheme whose NAV was Rs 20; in other words, you bought 5,000 units of the scheme. Let us assume that, the exit load is 1% for redemptions within 12 months from the date of purchase. Suppose after 8 months, the NAV of the scheme is Rs 23. The value of the 5,000 units will be Rs 1,15,000 lakhs. However, if you redeem (sell) all your units after 8 months, you will not get a credit of Rs 1,15,000 to the bank because exit load will apply. Exit load per unit will be 23 paise (1% X 23) and total exit load will be Rs 1,150. This amount will be deducted from your redemption proceeds and only Rs 1,13,850 will be credited to your bank account. Investors should note that, exit load does not just apply for redemptions; they are also applicable for switches, Systematic Transfer Plans (STP) and Systematic Withdrawal Plans (SWP), as long as those transactions take place, within the exit load period.
Growth and IDCW (earlier known as dividend) are essentially options of how investors want cash-flows. During the course of a year, a mutual fund scheme may make profits by buying and selling securities. In a growth option the profit is re-invested in the scheme whereas in the IDCW option, the profits may be distributed to the investors on a regular basis (annual, semi-annual, quarterly, monthly etc). Capital appreciation is much higher in growth option because investors benefit from compounding over a long investment horizon. However, some investors may need cash-flows during the tenure of the investment and IDCW option is suitable for such investors.
Let us see some common terms associated with one of the most important aspects of mutual fund investments, i.e. returns and what it means to you.
Absolute Return: Absolute return is the growth in your investment expressed in percentage terms. It can be understood with the help of a simple example. Suppose you invested Rs 1 Lakh in a mutual fund scheme. Three years later the value of your investment is Rs 140,000 you can know the value of your investment from the account statement sent to you by the AMC or the registrar (e.g. CAMS or K-Fintech). The total profit made by you is Rs 40,000. The absolute return earned by you in percentage terms is 40%. Absolute return ignores the time over which the growth was achieved; if your Rs 1,00,000 investment grew to Rs 140,000 in 5 years (instead of 3), the absolute return will still be 40%.
Annualized Return: Annualized return, as the name suggests, measures how much your investment grew in value on a yearly basis. An important thing to note in annualized returns is that the effect of compounding is included. Compounding is, very simply, profits made on profits. If you invested Rs 1,00,000 in a mutual fund scheme and the value of your investment after 3 years is Rs 1,40,000, then annualized returns will be 11.9%. Notice that annualized return of 11.9% is less than the absolute return (40%) divided by the investment period (3 years); this is due to compounding effect. If you invested Rs 1,00,000 in a mutual fund scheme and the value of your investment after 5 years is Rs 1,40,000, then annualized returns will be 7%.
Total Return: Total return is the actual rate of return earned from the investment and includes both capital gains and dividends. Let us assume that you invested Rs 1,00,000 in a mutual fund scheme at a NAV of Rs 20. The number of units of the scheme purchased by you is 5,000 (Rs 1,00,000 divided by Rs 20). The NAV of the scheme after 1 year is Rs 22. The value of your units after 1 year will, therefore, be Rs 1,10,000 (Rs 22 X 5,000 units). The capital gains made by you will be Rs 10,000. Let us also assume that, during the year, the scheme declared Rs 2 per unit as IDCW (dividend). Total dividend paid to you by the AMC would be Rs 10,000 (Rs 2 X 5,000 units). The total return earned by you will be Rs 10,000 capital gains + Rs 10,000 dividends = Rs 20,000. The total return in percentage terms will be 20%.
Trailing Return: Trailing return is the annualized return over a certain trailing period ending today. Let us understand this with the help of an example. Suppose the NAV of a scheme today (March 10, 2017) is Rs 100. 3 years back (i.e. March 10, 2014), the NAV of the scheme was Rs 60. The 3-year trailing return of the fund is 18.6%. Suppose the NAV of the scheme 5 years back (i.e. March 10, 2012) was Rs 50. The 5-year trailing return of the fund is 14.9%.
The trailing period can be 1 year, 2 years, 3 years, 5 years, 10 years etc; basically, any period. Trailing return is the most popular measure of mutual fund performance. The returns that you see on most mutual fund websites are actually trailing returns. If you go to any Mutual Fund Research website/ section and see the fund performances, the returns that you see are, in fact, trailing returns. Investors should note that, trailing returns are biased by current market conditions relative to market conditions prevailing at the start of the trailing period. Trailing returns are high in bull markets and low in bear markets.
Point to Point Return: As the name suggests, point to point returns measures annualized returns between two points of time. For example, if you are interested in how a mutual fund scheme performed during a particular period, say 2012 to 2014, you will look at point to point returns. To calculate point to point returns of a mutual fund scheme, you necessarily need to have a start date and end date. You will look up the NAVs of the scheme on start and end dates and then calculate the annualized returns.
Annual Return: Annual return of a mutual fund scheme is the return given by the scheme from January 1 (or the earliest business day of the year) to December 31 (last business day of the year) of any calendar year. For example, if the NAVs of a scheme on January 1 and December 31 are Rs 100 and 110 respectively, the annual return for that year will be 10%. Most mutual fund research portals, show annual returns of a scheme in the scheme details page. Annual returns are shown on the scheme details page in popular mutual fund websites. Mutual funds are market linked investments and the market conditions in a particular year will have a significant impact on annual returns. However, comparing annual returns across years relative to benchmark or fund category, can give you a sense of fund performance consistency.
Rolling Returns: Rolling returns are the annualized returns of the scheme taken for a specified period (rolling returns period) on every day/week/month and taken till the last day of the duration compared to the scheme benchmark (e.g. Nifty, BSE 100, BSE 200, BSE 500, CNX 500, BSE Midcap, CNX Midcap etc) or fund category (e.g. large cap funds, diversified equity funds, midcap funds, balanced funds etc). Rolling returns are usually shown in a chart format. A rolling returns chart shows the annualized returns of the scheme over the rolling returns period on every day from the start date, compared to the benchmark or category.
Rolling returns is not widely used in India, but is widely accepted globally as the best measure of a fund's performance. Trailing returns have a recency bias (as explained earlier) and point to point returns are specific to the period in consideration (and therefore, may not be relevant for the present time). Rolling returns, on the other hand, measures the fund's absolute and relative performance across all timescales, without any bias. Rolling return is also the best tool to understand, performance consistency and the fund manager performance.
We are among the very few mutual fund research portals which show rolling returns. You can see rolling returns of any mutual fund scheme relative to the benchmark, by using our tool Rolling Return vs Benchmark. You can see rolling returns of one or more mutual fund schemes relative to their fund category, by using our tool Rolling Return vs Category. In addition to the chart format, we also show rolling returns in a tabular format. To see rolling returns in tabular format on our portal, you can click on the button, See Rolling Returns in Tabular Format, on the bottom right-hand side in rolling return pages.
Quartile Ranking: Which is more important, absolute return or relative return? It differs from individual to individual and we can debate this till the cows come home, but the reality is that, in this competitive age, there is emphasis on relative performance, both in our workplace and also for our kids in school. Quartile ranking is a measure of relative performance of mutual fund scheme. Investors should note that, quartile ranking is not a measure of returns but is actually a rank based on return versus other funds in the category.
The rankings range from "Top Quartile" to "Bottom Quartile" for different time periods. Mutual funds with the highest percent returns in the chosen time period are assigned to "Top Quartile", whereas those with the lowest returns are assigned to "Bottom Quartile". Quartile rankings are compiled by sorting the funds based on trailing returns over a period chosen by the user. Funds in the top 25% are assigned the ranking of "Top Quartile", the next 25% are assigned a ranking of "Upper Middle Quartile", the next 25% after that are assigned a ranking of "Lower Middle Quartile" and the lowest 25% are assigned the ranking of "Bottom Quartile". While, the current quartile ranking of a mutual fund scheme is important, even more important is the consistency of quartile ranking across several quarters. You can see quartile ranks of different mutual fund schemes in a category in our research tool, Mutual Fund Quartile Ranking.
SIP Returns / XIRR: All the returns measures that we have discussed thus far, relate to lumpsum or one-time investments. Lump sum investment returns are relatively simpler to measure because, essentially you are measuring growth in investment value between two points of time (in the case of total returns, dividends, if any, also need to be factored). However, systematic investment plan (SIP) represents a series of cash-flows and so computing SIP returns is more complicated. The financial metric used to calculate the returns from a series of cash-flows (e.g. SIP, SWP, STP etc) is known as the Internal Rate of Return (IRR). The formula of IRR is outside the scope of this post. If cash-flows are not an exact regular time interval, then a modification of IRR, known as XIRR (in excel), is used to measure SIP returns.
You can see XIRR of SIPs of different mutual fund schemes across different time periods in any Mutual Fund Research website. If you want to see SIP returns over a specific time period, you can use our tool, Mutual Fund SIP Calculator. Some AMCs offer SIP products where you can increase the SIP instalments on an annual basis; these products are known as Step up SIP, SIP Top up etc.
There are various types of mutual fund schemes such as equity funds, debt funds, hybrid funds and solution-oriented funds etc.
Different types of Equity Funds
Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over long investment horizon. Equity Funds are more volatile than hybrid or debt funds and their returns are linked to the stock markets. They are best suited for investors who are seeking long term growth. There are different types of equity funds based on market caps of their underlying stocks e.g. large cap, midcap, small cap, large and midcap, multicap, flexicap etc. There are also equity funds which invest in a particular sector (e.g. infrastructure, financial services, IT, pharma, FMCG etc) or theme (e.g. manufacturing, consumption, MNC, PSU etc).
Large cap equity mutual funds
Top 100 companies by market capitalization are categorized as large cap companies. Large Cap Equity Funds invest at least 80% of their assets in large cap companies. These are usually leading companies in their industry sectors and have a strong track record financial performance. They are sought after by both domestic and foreign investors. Examples of some bluechip stocks are TCS, Reliance, ONGC, ITC, HDFC Bank etc.
Mid cap equity mutual funds
101st to 250th companies by market cap are categorized as midcap companies. Mid cap companies tend to be less well known, less researched and are thought to be more volatile than large cap companies. Mutual fund schemes which invest minimum 65% of their assets in mid cap companies are called mid cap funds. Midcap funds tend to be more volatile than large cap funds, but have higher growth potential.
Small cap equity mutual funds
251st and smaller companies by market capitalizations are categorized as small cap companies. Mutual fund schemes which invest minimum 65% of their assets in small cap companies are called small cap funds. Small cap funds tend to be more volatile than large and mid-cap funds, but they have higher growth potential.
Fixed income or Debt mutual funds primarily invest in a variety of fixed income securities like treasury bills, commercial papers, certificates of deposits, corporate bonds and government bonds, issued by different banks, companies and the Government. The fixed income securities are of a range of maturity profiles from short maturity period of 3 months to long maturity periods of 30 years or more. The primary investment objective of short-term debt mutual funds (short term maturity profile) is to generate income while that of long-term debt funds (long term maturity profile) is to generate both income and capital appreciation. Unlike bank deposits, debt funds are not risk-free investments.
There are two kinds of risk associated with debt funds:-
1. Interest rate risk
2. Credit risk
Long term debt funds have higher sensitivity to interest rate risks, while short term debt funds have lower sensitivity to interest rate risks. Corporate bond funds are exposed to credit risks. However, for the vast majority of debt mutual funds credit risk is quite low. Even the corporate bond funds, which aim to generate few percentage points of additional yield by investing in slightly lower rated corporate bonds, majority of the bonds in the fund portfolios are rated AAA and AA.
As per SEBI's classification, the main types of debt mutual funds available in India are as follows:
Liquid fund are money market mutual funds and invest primarily in money market instruments like treasury bills, certificate of deposits and commercial papers and term deposits, with the objective of providing investors an opportunity to earn returns, without compromising on the liquidity of the investment. Typically, they invest in money market securities that have a residual maturity of less than or equal to 91 days. This helps the fund managers of liquid funds in meeting the redemption demand from the investors.
Liquid funds provide a better alternative to investors who keep their surplus money parked in a savings bank account. While savings bank accounts typically pay interest rates in the range of 3 to 4%, liquid funds can potentially give much higher returns. Compared to other mutual fund categories, these funds have very low risk. Key benefits of liquid funds are :-
High liquidity: Liquid funds do not have any exit load. Therefore, they can be redeemed any time after investment without any penalty.
Higher returns than savings bank: Liquid funds give higher returns than savings bank. Savings bank interest rate is around 4%, whereas liquid funds can give higher returns by at least a few percentage points. The returns of liquid funds rise when bond yields rise and fall when bond yields fall, but they can always provide higher returns than savings bank.
Low volatility: Liquid funds are less volatile than longer term debt funds, since the underlying securities in their investment portfolio have short durations. Fixed income securities with short durations or maturities have lower interest rate risk, since the probability of the interest rates changing before the maturity of the securities is lower.
Unit Linked Insurance Plans (ULIPs) are combined life insurance cum investment products. Unlike traditional insurance plans e.g. endowment, money back plans, pension plans etc, ULIPs are market-linked instruments and have the potential to deliver higher returns compared to traditional plans. However, ULIPs, unlike traditional life insurance plans, do not offer capital safety. ULIPs provide investors with life insurance cover and at the same time investment in a fund of their choice.
Mutual fund, on the other hand, is a purely market linked instrument, which pools the money of different people and invests them in different financial securities like stocks, bonds etc. Each investor in a mutual fund owns units of the fund, which represents a portion of the holdings of the mutual fund.
One can think of ULIP as a mutual fund with a term life insurance plan attached to it. In terms of gross investment returns ULIPs have performed comparably with mutual funds over a 5-year period. However, net returns to investors are lower in ULIP because various costs are deducted from ULIP premiums before they are invested in the ULIP fund. A portion of the ULIP premium goes towards buying the life cover or sum assured. Another portion goes towards a variety of fees like, premium allocation fees, policy administration fees, fund management etc. The balance premium is then invested in the ULIP fund.
An Exchange Traded Fund is essentially a basket of stocks that reflects the composition of an Index, like the Sensex or the Nifty. The price of the ETF reflects the net asset value of the basket of stocks. Exchange Traded Funds (ETFs) are are listed and traded on exchanges like stocks. There are various categories of ETFs in India. They are:-
While an ETF is similar to a mutual fund in many ways, there are crucial differences between ETFs and mutual funds.
Unlike a mutual fund, where NAV is calculated at the end of the day, the price of the ETF changes real time throughout the day, based on the actual share prices of the underlying stocks at any point of time during the day.
Mutual funds are actively managed, whereas ETFs are passively managed. Mutual funds aim to generate an alpha (or outperformance versus a market benchmark), whereas ETFs aim to track a particular index.
Mutual funds have specific investment objectives, like capital appreciation, income generation, large cap stock focus, midcap stock focus, sector focus, etc. ETFs only aim to track the relevant index and reduce tracking errors.
Even though mutual funds aim to diversify unsystematic risks (or security specific risk), and they do diversify, to a large extent, there is likely to be still some residual unsystematic risk in mutual funds because mutual funds do not exactly reflect the market portfolio. ETFs, on the other hand, are only subject to systematic risk (or market risk), since they reflect the market portfolio. You need to have a demat account to invest in ETFs. On the other hand, you do not necessarily need to have a demat account to invest in mutual funds.