Building Blocks

A mutual fund pools money from thousands of investors into one large fund, which a professional fund house then invests in a basket of companies. You own units of the fund, and each unit represents a slice of everything the fund holds. So far, this sounds exactly like an ETF, and at heart the idea is the same: pooled money, a diversified basket, a unit that is your share of it.

The difference lies in how you buy and sell. An ETF trades on a stock exchange through the day, at a live price, like a share. A mutual fund does not. You buy and sell mutual fund units directly from the fund house, and all orders placed on a given day are settled at a single price struck once that day, after the market closes. That price is the NAV, or Net Asset Value, which is simply the total value of everything the fund holds, divided by the number of units. There is no second-by-second price and no trading on an exchange. You place your order, and you transact at that day's NAV. This one structural difference is the essential thing that separates a mutual fund from an ETF.

Mutual funds come in two flavours.

• A passive mutual fund, often called an index fund, simply tracks an index. Like an index ETF, it holds whatever the index holds and tries only to match its return, with no stock-picking. Because little human judgement is involved, it is cheap to run, and its fee is low.
• An active mutual fund is the opposite. Here a fund manager and their team research companies, form views, and deliberately pick which to buy and avoid, aiming to beat the index rather than match it. This is the traditional image of a mutual fund: a professional steering your money. The promise is outperformance, but it comes with two catches. It costs more, because that expertise must be paid for through a higher fee. And the outperformance is far from guaranteed; over long periods, a large share of active managers fail to beat the simple index they are measured against, even before their higher fees are counted.

Everything so far applies to mutual funds in general. For our purposes, one particular kind matters most: the international mutual fund, a fund offered by an Indian fund house like Motilal Oswal or Parag Parikh that invests your money in companies outside India.

This is important because of how you access it. An international mutual fund is bought in rupees, through the same familiar Indian platforms you would use for any domestic fund. You do not open a foreign brokerage account, you do not personally convert currency, and you do not directly send money abroad yourself. The fund house handles the overseas investing on your behalf, behind the scenes. For someone who wants global exposure without the friction of going offshore, this is the most convenient method, and we will see in the next module just how much that convenience is worth.

• Convenient access: an international mutual fund is bought in rupees on familiar Indian platforms, with no foreign account, currency conversion, or remittance to handle yourself.
• Professional management: the fund house does the investing for you, which suits anyone who would rather not pick holdings or manage a portfolio.
• Diversification: a single unit spreads your money across a basket of companies, so no one company can sink you.
• Passive options exist: index funds offer the same low-cost, market-matching approach as index ETFs, in an easier wrapper.

• Higher cost, especially active: professional management is paid for through fees, and active funds rarely beat the index enough to justify them over the long run.
• No live pricing: you transact only at the day's NAV, not at a live price you can act on through the day.
• Less control: you do not choose the underlying holdings; the fund house decides what sits inside.
• Convenience can carry hidden layers: some international funds invest through another fund, which can add a second layer of fees, something we look at in Fund of Funds.