Investing

Mutual Funds and Exchange-Traded Funds (ETFs) are two of India’s most popular investment vehicles today. While both pool investor money and invest in diversified assets, such as stocks, bonds, or gold, their operations and delivery of results can differ.

Why Investors Compare ETFs and Mutual Funds?

As more Indians explore investing beyond fixed deposits or real estate, questions like “ETF vs mutual fund, which is better​” are becoming common. Investors want to understand which option provides better returns, lower costs, and aligns with their investment style, whether hands-on or hands-off.

What We Will Learn From This Comparison?

This article will outline the basic structure and types of ETFs and Mutual Funds, as well as Key differences in trading, costs, and transparency. It will also compare ETF returns to mutual fund returns and provide real-world performance comparisons. 

Additionally, we will explore how a share advisory company can help you choose the right investment option based on your risk profile, financial goals, and market outlook, ensuring informed and strategic investment decisions.

What is a Mutual Fund and How It Works?

Let’s start by understanding what are mutual funds. A Mutual Fund is a professionally managed investment scheme that pools money from multiple investors and invests it in various assets, such as stocks, bonds, and gold. You buy units of a mutual fund based on its Net Asset Value (NAV), which is calculated at the end of each trading day. 

Additionally, understanding the tax implications of mutual funds is crucial, as capital gains from these investments are subject to taxation based on the type of fund and the holding period, which can impact your overall returns.

Types of Mutual Funds in India

1. Equity Mutual Funds – These funds invest primarily in shares of companies for long-term capital growth. Some examples include the SBI Bluechip Fund and the Axis Long Term Equity Fund.
2. Debt Mutual Funds – They invest in fixed-income instruments, such as corporate bonds, treasury bills, and government securities, offering more stability and predictable returns. Examples include the HDFC Corporate Bond Fund and the ICICI Prudential Gilt Fund.
3. Hybrid Funds – Hybrid funds combine equity and debt investments to balance risk and reward, offering moderate returns with reduced volatility.  Examples are ICICI Prudential Balanced Advantage Fund and HDFC Hybrid Equity Fund.
4. Index Funds – These passively managed funds mirror a market index, such as the Nifty 50 or Sensex, aiming to match its performance at a low cost.  Examples include Nippon India Index Fund – Sensex Plan and UTI Nifty Index Fund.
5. Thematic or Sectoral Funds – These focus on specific sectors, such as IT, pharmaceuticals, or banking, and are ideal for investors with a high risk appetite and sector knowledge. Examples are SBI Technology Opportunities Fund and Nippon India Pharma Fund.
6. Gold Mutual Funds – They indirectly invest in gold through Gold ETFs or other gold-linked instruments, offering a hedge against inflation.  Examples are HDFC Gold Fund and Kotak Gold Fund.

What is an ETF (Exchange-Traded Fund) and How ETFs Work?

An Exchange-Traded Fund (ETF) is a fund that trades on stock exchanges, just like a stock. It tracks an index, commodity, or sector, and investors can buy or sell ETFs at any time during market hours. ETFs are passively managed, meaning they simply mirror an index without trying to outperform it.

Types of ETFs in India

• Equity ETFs – Equity ETFs track stock market indices like Nifty 50, Sensex, or Nifty Bank, offering diversified equity exposure with low cost and flexibility.
  Example: Nippon India ETF Nifty BeES, ICICI Prudential Nifty Next 50 ETF.
• Gold ETFs –  Gold ETFs invest in physical gold prices without the hassle of storage, making them ideal for hedging against inflation and portfolio diversification.
  Example: HDFC Gold ETF, SBI Gold ETF.
• Debt ETFs –  Debt ETFs invest in fixed-income instruments such as government securities or corporate bonds, offering safer returns with lower volatility.
  Example: Bharat Bond ETF, ICICI Prudential Nifty PSU Bond Plus SDL ETF.
• International ETFs – International ETFs track foreign indices, such as the Nasdaq 100 or the S&P 500, offering Indian investors exposure to global markets.
  Example: Motilal Oswal Nasdaq 100 ETF, Edelweiss MSCI India Domestic & World Healthcare 45 ETF.
• Sectoral ETFs –  Sectoral ETFs focus on specific sectors such as banking, pharma, or IT, and are suitable for thematic investing.
  Example: Nippon India ETF Bank BeES, ICICI Prudential IT ETF.

ETF vs Mutual Fund: Key Differences

If you’re planning to invest in either a mutual fund or an ETF, it’s essential to understand the differences and know what an ETF is versus a mutual fund. It is also essential for investors to learn about ETF vs mutual fund performance​ and look for better results in the long run.

• ETFs can be traded on exchanges throughout the day, just like shares. Prices change in real-time based on market demand and supply.
  
• Mutual Funds are bought or redeemed only at the day’s closing NAV. No intraday trading is involved.
  

Expense Ratio and Cost Efficiency

• ETFs typically have lower expense ratios than mutual funds because they are passively managed.
  
• Actively managed mutual funds charge higher fees for fund management and research.
  

Transparency and Holdings Visibility

• ETFs disclose their portfolios on a daily basis, providing clear visibility into the underlying assets.
  
• Mutual Funds usually disclose holdings monthly or quarterly.
  

So if you prefer transparency, ETFs win here.

Liquidity and Access

• ETFs require a demat account and brokerage to trade. Liquidity depends on market volumes.
  
• Mutual Funds can be bought easily via SIPs, apps, and platforms, and are great for beginners.
  

Mutual funds offer more convenience when investing in regular investments, such as SIPs.

Active vs Passive Management

• Mutual Funds (especially equity funds) are often actively managed to beat the market.
  
• ETFs mostly follow passive strategies by tracking an index.
  

If you believe in active management strategies, mutual funds may be a suitable option for you. But for market-average returns at lower cost, ETFs are ideal.

ETF vs Mutual Fund Returns in India: Which Delivers Better Returns Historically

• Historically, actively managed equity mutual funds have occasionally outperformed index-tracking ETFs, particularly in small-cap and mid-cap segments.
  
• However, Nifty 50 or Sensex ETFs have delivered strong long-term returns with lower volatility.
  

How Expense Ratios and Tracking Errors Impact Returns?

• Higher expense ratios in mutual funds can reduce your net return.
  
• ETFs can suffer from tracking errors, which means the ETF doesn’t perfectly mimic its index.
  

When comparing ETFs vs. mutual fund returns in India, always consider post-cost returns.

When Passive ETF Investing Outperforms Active Mutual Funds?

In rising markets where most stocks perform well, ETFs often outperform due to lower costs. Also, during volatile or uncertain periods, passively managed ETFs show resilience.

ETF vs Mutual Fund Performance: Real Examples 

• Nippon India ETF Nifty 50 BeES –  5-year CAGR 24 Apr 2020 – 24 Apr 2025) 169% Source: ET Money
  
• ICICI Prudential Bluechip Fund Direct-Growth – 5 year CAGR 24 Apr 2020 – 24 Apr 2025 25.29% Source: ET Money

The ETF delivered significantly higher returns than the mutual fund over the same 5-year period, indicating outperformance in capital appreciation. This suggests that, during this specific timeframe, the passively managed Nippon India ETF Nifty 50 BeES not only kept pace with the market but also far exceeded the returns of the actively managed ICICI Prudential Bluechip Fund. Such outperformance may be attributed to lower expense ratios, a strong market rally in large-cap stocks, or a low entry price during a market dip. 

Performance of Gold ETFs vs Gold Mutual Funds

• Gold ETF (e.g., SBI Gold ETF): Tracks the gold price directly.
  
• Gold Mutual Fund (e.g., HDFC Gold Fund): Indirectly invests in Gold ETFs.
  

​When comparing the performance of Gold ETFs and Gold Mutual Funds, both investment vehicles have demonstrated similar returns over specific periods.  

For those considering gold ETFs in 2025, several top-performing options stand out due to their consistent returns over the past year (2024). Axis Gold ETF leads with an impressive 1-year return of 26.08%, followed by HDFC Gold ETF at 25.62%, and ICICI Prudential Gold ETF at 25.39%. 

If you’re focusing on gold mutual funds in 2025 based on 1-year returns,  Quantum Gold Fund leads with a return of 25.52%. It is followed closely by Aditya Birla Sun Life Gold Fund at 25.18% and Quantum Gold Savings Fund at 25.05%. Kotak Gold Fund also delivered a solid return of 24.83%. These funds have shown strong momentum over the past year, making them appealing choices for near-term gold investments.Source: Financialexpress.com

Regarding physical gold, it has generated impressive returns over the past 10 to 15 years. According to the India Bullion and Jewellers Association (IBJA), gold prices have increased by approximately 9–10% annually from 2010 to 2025 and by nearly 12% per year over the past decade, surpassing many conventional fixed-income investments. 

During the same period, gold ETFs have offered similar returns, slightly lower due to the fund management fees, which typically range from 0.3% to 1%.

For example, Nippon India Gold ETF and SBI Gold ETF have delivered average annual returns of approximately 8.5% to 9.5% from 2015 to 2025.  Source: Moneycontrol

These figures indicate that Gold ETFs and Gold Mutual Funds have provided similar returns over these periods. Gold ETFs are slightly more cost-efficient. But for SIP users or those without a demat account, gold mutual funds offer easier access. 

Investor Profiles That Suit ETFs 

ETFs are better for:

• Investors are comfortable with online trading platforms
  
• Investors want to monitor holdings regularly.
  
• Short-term traders and those with a demat account
  
• Cost-sensitive investors
  

Investor Profiles That Suit Mutual Funds 

Mutual Funds Suit:

• New investors seeking automated and guided investing
  
• Long-term SIP investors looking for wealth creation
  
• Investors without a demat account
  
• Those who prefer expert management
  

Which Option Is Better for Long-Term Wealth Creation?

ETFs could be a good option for long-term investors seeking consistent returns and lower expenses. Index ETFs, which track broad market benchmarks, offer diversification and typically have lower expense ratios than actively managed mutual funds. Similarly, gold ETFs provide a cost-effective investment in the precious metal. Lower costs and diversified exposure can contribute to more stable long-term growth.

ETF vs Mutual Fund Comparison   

Conclusion

When evaluating an ETF versus a mutual fund, it is essential to note that both are practical investment tools. ETFs are simple, low-cost, and efficient—ideal for those who enjoy monitoring and trading regularly. On the other hand, Mutual Funds are like manual driving—you may gain more control and potentially better returns with skill, but you might also face a few bumps along the way.

If you prefer a hands-off approach with the convenience of regular investing, mutual funds with Systematic Investment Plans (SIPs) are a great option. You can even use a SIP calculator to estimate long-term returns and plan your investments more efficiently.

There’s no one-size-fits-all answer to ETF vs mutual fund, which is better—your financial goals, risk tolerance, and investment experience should guide your choice.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

Introduction

If you’re exploring investment options, you’ve probably come across the debate of PMS vs mutual funds. It’s a common question among Indian investors, especially when you’re trying to balance risk, return, and control over your portfolio. Whether you’re just starting or have some experience with investments, understanding the difference between PMS vs mutual funds in India can help you make smarter financial decisions.

Why Investors Compare PMS and Mutual Funds?

People often compare mutual funds vs PMS because both give access to professionally managed portfolios. But that’s where the similarity ends. The key difference lies in the level of control, the capital required, and the method by which returns are generated. Understanding the differences between investment in PMS and mutual funds will give you clarity on which option suits your investment style.

Who Should Consider These Investment Vehicles?

Both PMS and mutual funds are excellent tools, but they are designed for different types of investors. If you have a high-risk appetite and have sufficient capital, a PMS might be a suitable option for you. On the other hand, if you prefer a more accessible and budget-friendly way to enter the market, mutual funds are likely the better fit.

What is PMS (Portfolio Management Services)?

Definition and How PMS Works

Portfolio Management Services (PMS) offer customized investment solutions to individuals with a high net worth. A portfolio manager constructs a personalized portfolio of stocks, bonds, or other securities tailored to your preferences, goals, and risk tolerance. It’s like having your personal fund manager.

Types of PMS: Discretionary vs Non-Discretionary

• Discretionary PMS: The fund manager makes decisions on your behalf.
  You don’t have to be involved in the day-to-day decisions—the manager handles everything from stock selection to timing based on your agreed strategy.
  
• Non-Discretionary PMS: The manager provides advice, but you ultimately make the final decision.
  You stay in control and make the investment decisions after reviewing the manager’s suggestions, which means you’re more involved in the process.

Minimum Investment Requirement for PMS in India

According to SEBI guidelines, the minimum investment for a PMS is ₹50 lakhs. Therefore, it’s not intended for small or first-time investors.

What is a Mutual Fund?

How Mutual Funds Work for Individual Investors

Mutual funds pool money from multiple investors and invest in a diversified portfolio of assets, including equities, bonds, and money market instruments. A professional fund manager oversees the investments, and you get units based on your investment amount.

Types of Mutual Funds: Equity, Debt, Hybrid

• Equity Funds: Invest in stocks; high risk, high return.
  
• Debt Funds: Invest in bonds for lower risk and stable returns.
  
• Hybrid Funds: Mix of equity and debt.
  

Minimum Investment Requirement for Mutual Funds

You can start with as little as ₹100 using a Systematic Investment Plan (SIP). You can use a sip calculator to estimate future returns.

PMS vs Mutual Fund: Key Differences

1. Customization and Portfolio Control
   
   • PMS: Fully customizable. You own specific securities.
     
   • Mutual Funds: You own units in a pooled fund, not individual stocks.
     
2. Fund Management Approach
   
   • PMS: Tailored to your financial goals.
     
   • Mutual Funds: Follows a predefined investment strategy.
     
3. Transparency and Reporting
   
   • PMS: You get detailed reports of every stock bought/sold.
     
   • Mutual Funds: Less granular but still transparent.
     
4. Minimum Investment Criteria
   
   • PMS: ₹50 lakhs
     
   • Mutual Funds: As low as ₹100
     
5. Cost and Fee Structure
   
   • PMS: Charges include management fees, profit sharing, and transaction charges.
     
   • Mutual Funds: Typically have lower expense ratios.
     
6. Liquidity and Lock-in Period
   
   • PMS: Not as liquid; exiting may take time.
     
   • Mutual Funds: Highly liquid unless it’s a tax-saving fund like ELSS.
     
7. Risk and Return Expectations
   
   • PMS: Higher risk, potential for higher returns.
     
   • Mutual Funds: Risk is diversified, and returns are relatively stable.
     

Table: PMS vs Mutual Fund Comparison at a Glance

Which Is Better for You – PMS vs Mutual Fund?

When Should You Choose PMS

• You have ₹50 lakhs or more to invest.
  
• You want a tailor-made strategy.
  
• You’re okay with taking on a higher risk for potentially higher returns.
  
• You want direct ownership of stocks and better tax optimization.
  

When Mutual Funds Make More Sense

• You’re starting your investment journey.
  
• You want diversified, professionally managed exposure with low entry cost.
  
• You prefer liquidity and lower risk.
  
• You want to explore top mutual funds across various categories.
  
• Additionally, the benefits of mutual funds—such as affordability, tax efficiency, and ease of access—make them an ideal choice for most retail investors.

Understanding Risk Appetite, Capital Availability, and Goals

If you’re just trying to grow your savings gradually, mutual funds work great. However, if you’re seeking aggressive growth with a substantial corpus, a PMS might be a suitable option. Just make sure to consult a stock market advisory before making the final call.

Investment in PMS vs Mutual Fund: Taxation and Compliance

• Capital Gains and Tax Implications for PMS

In PMS, gains are taxed based on each security sold, so you pay Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG) as per your transactions.

• Taxation Rules for Mutual Funds

Tax is applicable when you redeem units. Equity funds attract 15% STCG (if sold before 1 year) and 10% LTCG (after 1 year for gains above ₹1 lakh).

• SEBI Regulations and Investor Protection

Both are SEBI-regulated, but mutual funds have stricter guidelines to protect small investors. PMS gives more flexibility, but with higher responsibility.

Conclusion

Summary: Choose Based on Customization, Capital, and Control

There’s no one-size-fits-all answer to PMS vs Mutual Funds. If you want customization and have a high investment amount, go for PMS. If you’re looking for a low-cost, diversified investment with flexibility, mutual funds are your best friend.

PMS and Mutual Funds Can Coexist in a Diversified Portfolio

You can even invest in both—allocate based on your risk appetite and long-term goals. For example, you might use mutual funds for stable, long-term wealth creation and liquidity, while using PMS for more focused, high-growth opportunities. Combining both can help you strike a balance between safety and performance, giving your portfolio both depth and flexibility.

FAQs on PMS vs Mutual Fund

Introduction

Imagine building a house with only bricks and no cement—strong in parts, but vulnerable overall. That’s what an unbalanced investment portfolio looks like. While high-return assets like equities may promise growth, relying solely on them can expose you to unnecessary risk. On the flip side, playing too safe with fixed-income instruments might protect your capital, but won’t build meaningful wealth over time.

The real magic lies in creating a balanced investment portfolio—one that smartly blends growth, stability, liquidity, and inflation protection. It’s not just about diversification, but about aligning your portfolio with your life’s goals, financial responsibilities, and risk tolerance.

In this article, we will dive deep into how to strike the right balance in your investment strategy. Whether you are a young professional starting out or someone mid-career planning for retirement, this guide will help you build a portfolio that performs not just in bull markets, but across life’s ups and downs.

What Exactly is a Balanced Portfolio?

A balanced portfolio is a well-structured mix of different asset classes—such as equities, debt instruments, gold, real estate, and cash—designed to deliver steady returns while minimizing overall risk. The goal isn’t to chase the highest returns or avoid all risks, but to find the right blend that aligns with your financial goals and risk appetite.

Think of it as your financial ecosystem—when one asset class underperforms, others step in to stabilise the overall performance. This balance cushions your investments during market volatility, ensuring long-term growth.

Core Features of a Balanced Portfolio:

• Diversification: Spreads risk across assets that don’t move in the same direction
• Consistency: Aims for steady returns across market cycles
• Customisation: Adjusts based on age, life goals, and income profile
• Resilience: Reduces the impact of market shocks or economic downturns

Whether you are saving for retirement, a child’s education, or buying a home, a balanced portfolio ensures you are not putting all your financial eggs in one basket—and that’s the hallmark of smart investing.

Why Is a Balanced Portfolio So Important?

In investing, uncertainty is the only certainty. Markets rise and fall, sectors rotate, and economic cycles turn without warning. A balanced portfolio acts as your financial anchor, keeping you grounded when markets are euphoric and steady when they turn turbulent.

Here’s why creating balance in your portfolio is not just smart, but essential:

1. Reduces Risk Without Sacrificing Growth:

Relying too heavily on one asset class—say, equities—can expose your wealth to high volatility. A balanced portfolio spreads your risk across multiple assets, helping you absorb shocks while still capturing upside potential.

Example: During the 2020 market crash, while equities dipped sharply, gold and debt instruments remained relatively stable. Balanced portfolios recovered faster because gains in one area cushioned losses in another.

2. Ensures Consistent, Long-Term Performance:

Markets are cyclical. What performs well today may lag tomorrow. A diversified mix smooths out these fluctuations, providing more predictable and consistent returns over time, which is crucial for long-term goals such as retirement or education planning.

3. Aligns With Changing Life Stages:

As your life progresses, so do your financial needs and risk tolerance. A balanced portfolio is flexible by design, allowing you to adjust your asset allocation as you move from wealth accumulation to preservation.

Example: A 30-year-old can afford to hold 70% in equities. However, by the time they reach 55, they may shift to a 40:40:20 mix of debt, equity, and gold to reduce volatility.

4. Promotes Disciplined Investing:

Balance encourages a goal-based, structured investment approach rather than emotional, reactionary decisions. It helps investors stay invested, even during downturns, because not all assets decline simultaneously.

Key Components of a Balanced Portfolio in India

How to Strike the Right Portfolio Balance

Achieving a balanced portfolio isn’t just about mixing assets—it’s about aligning your investments with your life. It’s a dynamic strategy that evolves with your goals, risk appetite, and time horizon. The right balance protects your wealth during downturns and fuels growth when markets soar. So, how do you strike that sweet spot?

Start with Your Goals

Every financial journey begins with a clear destination. Are you investing for a near-term purchase, a child’s education, or long-term retirement? Your goals dictate your investment horizon, which in turn shapes your asset allocation.

Short-term goals (0–3 years): Prioritise capital preservation with liquid funds, fixed deposits, or short-term debt.

Medium-term goals (3–7 years): A blend of equity and debt can offer both growth and stability.

Long-term goals (7+ years): Higher exposure to equities is ideal to benefit from compounding and market growth.

2. Assess Your Risk Tolerance: 

Understanding your risk tolerance is crucial to building a portfolio that you can stick with through market fluctuations. It reflects both your financial capacity and emotional comfort with potential losses. Ask yourself: How would I react if my portfolio dropped 20%? If the idea makes you anxious, you might lean toward a conservative or moderate approach. If you’re comfortable with riding out volatility for higher returns, an aggressive strategy may be suitable for you.

Broadly, investors fall into three categories—conservative, who prioritise stability and capital preservation; moderate, who seek a balance between risk and reward; and aggressive, who are willing to accept short-term losses for long-term growth. Aligning your portfolio with your true risk appetite helps you stay committed, avoid impulsive decisions, and stay on track with your financial goals.

3. Diversify Across Asset Classes:

True portfolio balance comes from spreading your investments across different asset classes, not just within equity. Each asset plays a unique role in managing risk and enhancing returns:

• Equity fuels long-term growth
• Debt instruments offer stability and steady income
• Gold acts as a hedge against inflation and economic uncertainty
• Real estate or REITs build long-term wealth and generate passive income
• Cash or liquid funds ensure liquidity for short-term needs or emergencies

When one asset dips, another often offsets the loss. That’s the strength of a well-diversified portfolio—it keeps you steady through all market cycles.

4. Rebalance Regularly

Over time, market movements can shift your portfolio away from its original mix. For instance, a 60% equity allocation might grow to 75% after a rally, exposing you to more risk than planned. Rebalancing helps restore the intended balance, keeping your risk level aligned with your goals. Think of it as a financial health check. Aim to review and rebalance your portfolio every 6 to 12 months to stay disciplined and on track.

5. Adapt as You Evolve: Your financial journey changes with life stages—so should your investment portfolio. In your 30s, you may favour a growth-oriented strategy with higher equity exposure. By your 50s, the focus often shifts to capital preservation and income stability.

• A common rule of thumb is: 100 minus your age = ideal equity allocation.

However, this isn’t a one-size-fits-all approach—adjust it based on your job security, financial responsibilities, and comfort level with risk.

• For instance, a 35-year-old might hold 65% equity, 25% debt, and 10% gold, while someone at 55 could lean towards 40% equity, 50% debt, and 10% gold. The key is to let your portfolio grow and adapt with you.

6. Build Habits, Not Just Portfolios: A well-balanced portfolio thrives on discipline, not just strategy. Automate your investments through Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs) to ensure consistency, regardless of market fluctuations.

Utilize technology tools or consult a financial advisor to help monitor your progress and rebalance as needed. When you remove emotion and stick to a routine, your portfolio is more likely to deliver steady, long-term results.  In conclusion, a balanced portfolio is not a one-size-fits-all formula—it’s a dynamic strategy that evolves in response to life stages, financial goals, and changing market conditions. By maintaining the right mix of assets, staying diversified, and rebalancing periodically, you can not only reduce risk but also unlock the true potential of your wealth.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQs

Introduction:

When we think of stock trading in India, names like NSE and BSE instantly come to mind. These are the mainstream platforms where listed securities are bought and sold. However, beyond these well-known exchanges lies a parallel universe of trading—less visible, but equally dynamic—known as the Over-the-Counter (OTC) market.

OTC trading involves buying and selling financial instruments directly between two parties, without the oversight of a centralized exchange. It plays a crucial role in India’s financial ecosystem by offering access to unlisted shares, debt instruments, and pre-IPO securities that are otherwise unavailable on formal exchanges. For many seasoned investors, this hidden segment offers both lucrative opportunities and unique challenges.

In this article, we will take a deep dive into the structure of OTC markets in India, the types of securities traded, regulatory considerations, and what every investor should know before stepping into this lesser-known yet increasingly relevant part of the capital market.

What is OTC (Over-the-Counter)?

OTC, or Over-the-Counter, refers to a decentralized market where financial securities are traded directly between two parties—outside of a formal exchange like NSE or BSE. These trades are usually facilitated by brokers, dealers, or online platforms, without the prices being publicly disclosed on a central platform.

Unlike listed securities that trade on stock exchanges under strict regulations and transparency, OTC markets operate with less regulatory oversight, offering flexibility—but also carrying more risk.

The Objective of OTC Options

OTC options are primarily used by investors, hedgers, and speculators who seek flexibility beyond the limitations of exchange-traded options. These contracts are privately negotiated, allowing both parties to tailor terms such as strike prices, expiration dates, and contract size according to their specific needs—something that’s not possible with standardized market instruments.

This customisation helps participants manage unique financial risks or strategies more effectively and often more efficiently. However, since OTC trades bypass exchanges and clearinghouses, they come with greater counterparty risk and reduced transparency. The lack of regulatory oversight means both parties must rely heavily on trust and due diligence.

In essence, the objective of OTC options is to provide precision, privacy, and adaptability, making them a valuable tool for institutions and sophisticated investors—but one that requires careful handling.

Different Types of OTC Derivatives Based on Underlying Assets

Over-the-counter (OTC) trading encompasses a variety of financial instruments, with each type of derivative linked to a distinct class of underlying asset. Below are the key types of OTC derivatives:

1. Interest Rate Derivatives: These derivatives are based on traditional interest rates. One common example is interest rate swaps, where two parties exchange fixed and floating cash flows over time. These swaps allow participants to hedge against fluctuations in interest rates, making them valuable tools for financial institutions.

2. Commodity Derivatives: OTC trading also includes contracts tied to physical commodities like gold, oil, or agricultural products. Forward contracts in commodities are a typical example, where parties agree to buy or sell a commodity at a predetermined price at a future date, often used by producers and consumers to mitigate price risk.

3. Equity Derivatives: Equity derivatives are based on stocks or stock indices. Common OTC instruments in this category include stock options and equity futures, which enable investors to speculate on or hedge against price movements in specific stocks or broader equity markets.

4. Forex Derivatives: These derivatives are linked to foreign exchange rates. Forex derivatives, such as forward contracts and currency swaps, allow traders to manage or speculate on changes in the exchange rates between two currencies, helping businesses mitigate currency risk.

5. Fixed Income Derivatives: In this category, the underlying assets are fixed income securities, like bonds. OTC derivatives in the fixed-income market can include interest rate swaps or bond options, which help investors manage risks related to interest rate movements or bond price fluctuations.

6. Credit Derivatives: Credit derivatives enable one party to transfer the risk of credit events (such as defaults) to another. The two main types are funded and unfunded credit derivatives. Well-known examples include Credit Default Swaps (CDS) and Credit Linked Notes (CLNs), which allow investors to manage credit exposure without directly exchanging the underlying securities.

Advantages and Disadvantages of OTC Derivatives

Here’s a comparison table outlining the advantages and disadvantages of OTC (Over-the-Counter) derivatives:

Is OTC Trading Safe?

While OTC trading can be a valuable tool for certain investors, it is not without its risks. The lack of transparency, counterparty risk, and regulatory oversight can make OTC trading riskier than exchange-based trading. However, with proper risk management strategies, such as due diligence, collateral requirements, and legal safeguards, participants can reduce these risks and engage in OTC markets safely.

Investors looking to enter the OTC market should have a clear understanding of the instruments they are trading, the counterparty they are dealing with, and the specific terms of the contract. For those unfamiliar with OTC trading, it is advisable to consult with financial advisors or experts in the field before engaging in such transactions.

In conclusion, OTC trading offers flexibility and access to non-listed assets, making it an attractive option for sophisticated investors. However, it is crucial to recognise the risks involved—such as counterparty risk, lack of transparency, and potential regulatory gaps. 

For investors willing to manage these risks effectively, OTC trading can be a valuable addition to their portfolio. However, for those new to the concept, careful consideration and expert guidance are recommended to understand this complex market.

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

FAQ

Investing in mutual funds is not just for finance pros or stock market experts. With the rise of easy-to-use apps and zero-commission platforms, anyone can learn how to invest in direct mutual funds—and you don’t even need a broker!

In this guide, we’ll break it all down for you in plain, simple language. Whether you’re just starting your financial journey or switching from regular mutual funds, understanding how to invest in direct mutual funds online can help you take better control of your money.

Why Direct Mutual Funds Are Gaining Popularity?

So, why is everyone talking about direct plans these days?

It’s simple: in a direct mutual fund, you invest directly with the fund house, cutting out the middleman. That means no commissions. No hidden fees. More returns in your pocket. Over time, this small difference can lead to substantial gains. And if you’re just starting to explore what are mutual funds, direct plans are a great way to dive in with more transparency and control.

What Makes “Direct” Plans Different from “Regular” Plans?

You may have heard the term “direct vs regular mutual funds.” Here’s what that means:

• Direct Plans: You invest directly with the mutual fund company (AMC)—no distributor involved. No commission. Better returns.
  
• Regular Plans: Investments are managed through an intermediary, such as a bank or broker. You pay a small commission every year from your returns.

When comparing returns over 5–10 years, the direct plan typically outperforms. That’s why more and more people want to learn how to invest in direct plan mutual fund options instead of regular ones.

What Are Direct Mutual Funds?

Definition of Direct Plans in Mutual Funds

A direct mutual fund is simply a mutual fund where you invest directly through the Asset Management Company (AMC), without any broker or agent—this is the core idea behind investing in direct plan mutual funds, the smart way.

Direct vs Regular Mutual Funds: Key Differences

Benefits of Investing in Direct Mutual Funds

• Higher returns due to no commission cuts
  
• More transparency in charges and NAV
  
• Full control over your investments
  
• Suitable for DIY investors who want to be hands-on
  

How to Invest in Direct Mutual Funds in India?

If you’re wondering how to invest in direct mutual funds without any confusion, this section is for you. Investing directly may sound technical, but it’s a straightforward process. From setting your goals to picking the right plan and platform, here’s a step-by-step guide on how to invest in direct mutual funds in India with ease.

1. Identify Your Investment Goals

Are you saving for a house? Your child’s education? Retirement? Whether short-term or long-term, your goals will determine your strategy.

2. Choose the Right Mutual Fund Category

You can choose from:

• Equity Funds (for long-term growth)
  
• Debt Funds (for stability and fixed income)
  
• Hybrid Funds (a mix of both)
  

Use a tool like a sip calculator to understand how much you need to invest monthly to reach your goal.

3. Select the Direct Plan of Your Chosen Fund

When searching, always pick the plan with “Direct” mentioned in the name. For example: “HDFC Midcap Opportunities Fund – Direct Plan – Growth.”

4. Complete the KYC Process

You can do this online or offline. You’ll need:

• PAN Card
  
• Aadhaar Card
  
• Bank Details
  
• A selfie or in-person verification (for some platforms)
  

5. Invest via AMC Website, App, or Third-Party Platform

If you want to know how to invest in mutual funds directly in India, this is the way to go. You can visit the official website of the mutual fund house (AMC), use their app, or choose a trusted, zero-commission platform. These options make the investment process simple, fast, and paperless.

6. Set Up SIP or Lumpsum Investment

You can invest:

• SIP (Systematic Investment Plan) – monthly fixed investment
  
• Lumpsum – one-time large investment
  

Starting small? Go with SIP. It’s less stressful and builds discipline.

How to Invest in Direct Mutual Funds Online?

Now, let’s discuss how to invest in direct plans of mutual funds online.

1. Investing Through AMC Websites

Visit the official website of the mutual fund (such as ICICI, Axis, or HDFC) and create an account. Choose the fund and select the direct plan.

2. Using Government Platforms

MF Central (by AMFI) or RTAs like CAMS and KFintech enable you to manage multiple Asset Management Companies (AMCs) in one place.

3. Popular Zero-Commission Apps

Apps like Groww, Kuvera, and Paytm Money make it super easy. Just search, select, and start investing.

How to Track and Manage Your Direct Mutual Fund Investments?

Once you’ve learned how to invest in direct mutual funds, the next important step is to manage them smartly. Staying on top of your investments enables you to make informed decisions and stay aligned with your financial objectives. Here’s how you can do it:

• Monitoring Performance Through AMC Portal or CAS

Log in regularly to the AMC’s official website or the app you used to invest. Most platforms offer detailed dashboards showing your fund’s current value, returns, and performance over time.

You can also check your Consolidated Account Statement (CAS)—a single report that shows all your mutual fund holdings across different AMCs. It’s like a snapshot of your entire investment portfolio, sent to your email monthly or on request.

• Reviewing SIP Progress, Portfolio Rebalancing, and Exit Load Awareness

Every 3 to 6 months, take a quick look at how your SIPs are doing. Are the funds meeting your expectations? Are they still aligned with your goals?

Once a year, rebalance your portfolio if needed—maybe shift between equity and debt based on your risk appetite or life stage.

Also, be aware of exit loads—fees that apply if you withdraw funds too early from certain accounts. Keeping track of these ensures you don’t lose a chunk of your gains unexpectedly.

Pros and Cons of Direct Mutual Fund Investing

Pros:

• No commission – You don’t pay any agent or distributor fees, which means more of your money stays invested and works for you.
  
• Higher returns – Since no commissions are deducted from your profits, direct plans typically yield better long-term returns compared to regular plans.
  
• Direct access to fund info – You get transparent, real-time updates directly from the AMC, helping you stay in control of your investments.

Cons: 

• No hand-holding – There’s no advisor to guide you, so you have to make your own decisions and understand what suits your needs.
  
• Requires basic research –  To make smart choices, you’ll need to spend a little time understanding fund types, risk levels, and market behavior.
  
• May feel overwhelming at first. If you’re just starting and figuring out how to invest in direct mutual funds, the process may seem confusing, but it becomes easier with time.

Who Should Choose Direct Plans Over Regular Ones?  

If you’re someone who likes learning and wants control over your money, direct plans are a great fit. If not, consider consulting a stock market advisor before investing.

Conclusion

Choosing direct plans makes sense if you’re seeking better returns and greater control over your investments. Now that you understand how to invest in direct mutual funds, it’s time to take the next step. You don’t need to be a finance expert—just a clear goal and a few minutes to get started. The sooner you begin, the better your chances of building long-term wealth.

FAQs on How to Invest in Direct Mutual Funds

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