Investing in mutual funds can be a smart way to grow your wealth, especially if you are new to investing and looking for a relatively low-risk option.
In this article, we will provide a beginner’s guide to investing in mutual funds in India.
What are Mutual Funds?
A mutual fund is a type of investment vehicle that pools money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. The fund is managed by a professional fund manager who makes investment decisions on behalf of the fund’s investors.
Why Invest in Mutual Funds?
There are several benefits to investing in mutual funds, including:
Professional Management: Mutual funds are managed by experienced and knowledgeable fund managers who conduct market research and make informed investment decisions to generate favourable returns.
High Returns: Compared to other investment options such as fixed deposits, mutual funds offer higher returns by investing in a variety of financial instruments. Equity mutual funds offer the potential for high returns, but come with higher risks, while debt funds offer lower risks with better returns.
Diversification: Mutual funds offer diversification by investing in a wide range of assets, reducing the risk and providing balanced returns even if one asset does not perform well.
Convenience: The process of investing in mutual funds has been made quick and easy with many fund houses offering online investment options and the ability to complete the KYC process online.
Low Cost: Starting to invest in mutual funds can be done with as little as Rs. 5,000 (lump sum) or Rs. 500 for a monthly SIP. Additionally, choosing a direct plan eliminates the need to pay commissions to agents or distributors.
Disciplined Investing: A Systematic Investment Plan (SIP) allows investors to invest small amounts regularly, with the frequency determined by the investor. The auto-debit option makes it easy to maintain a consistent investment pattern without manual intervention.
By understanding the benefits of investing in mutual funds, individuals can take control of their finances and see their wealth grow over time.
Types of Mutual Funds in India
There are several types of mutual funds available in India, including:
Equity Funds: These funds invest primarily in stocks and aim to provide long-term growth.
Debt Funds: These funds invest in fixed-income securities such as bonds and aim to provide a steady income.
Balanced Funds: These funds invest in a mix of stocks and bonds, providing a combination of growth and income.
Liquid Funds: These funds invest in highly liquid, low-risk securities such as government bonds and aim to provide a high level of safety.
Tax-Saving Funds (ELSS): These funds invest primarily in equities and offer tax benefits under Section 80C of the Income Tax Act.
How to Choose a Mutual Fund
When choosing a mutual fund, it’s important to consider the following factors:
Investment Objective: Consider your personal financial goals and choose a mutual fund that aligns with those goals.
Fund Manager: Look at the track record of the fund manager and the investment style they use.
Fund Expense Ratio: This is the fee charged by the fund manager to cover the expenses of managing the fund. Look for a fund with a low expense ratio.
Fund Performance: Consider the past performance of the fund, but keep in mind that past performance is not a guarantee of future performance.
Fund Size: Larger mutual funds can provide greater liquidity and stability, but smaller funds may offer more potential for growth.
Fund Holdings: Look at the holdings of the fund to see what types of investments it holds.
Step-by-step guide on how to invest in a mutual fund
Here is a step-by-step guide on how to invest in Mutual Funds in India:
- Choose a Mutual Fund: Research and compare different mutual funds offered by various fund houses to choose the one that best suits your investment goals and risk tolerance.
- Open a Mutual Fund account: You can open an account either directly with the fund house or through a registered intermediary like a bank, broker, or online investment platform.
- Complete your KYC: Investing in a fund requires investors to follow the KYC (Know Your Customer) guidelines, which include submitting necessary documents such as a PAN card, proof of residence, age proof, etc. as specified by the fund company.
- Provide bank details: Provide your bank account details so that your investment and any potential returns can be credited or debited to your bank account.
- Know about the various mutual fund schemes available: To understand the available options, it’s important to study the various schemes. This will help you match your investment goals, risk tolerance, and budget with the right scheme. If you need assistance, consider seeking the advice of a financial advisor. Ultimately, it’s your money, so you want to make sure it’s invested to maximise your mutual fund returns.Note: If you are a new and inexperienced investor or unsure in which scheme to invest and need guidance/assistance in investing, you may be better off seeking help from a mutual fund distributor and investing in Regular Plan.
- Know about the risk involved: Investing in mutual funds involves certain risks. Schemes that promise high returns typically come with higher risks. If you’re willing to take on more risk for the chance of higher returns, you may consider investing in equity schemes. On the other hand, if you prefer stability and are comfortable with moderate returns, debt schemes may be a better choice for you.
- Start Investing: Once your application is processed, you can make a lump sum investment or set up a SIP to invest a fixed amount at regular intervals.
It’s important to note that mutual funds come with associated risks, so it’s essential to carefully consider your investment goals, risk tolerance, and other factors before making an investment.
Different methods of investing in mutual funds are:
Direct investment with the fund house: You can invest directly visit the nearest branch office of the fund house and invest in their schemes. Make sure to bring proof of identity, address, a cancelled cheque leaf, and a passport-sized photo. The fund house will provide an application form that needs to be filled out and submitted along with the required documents.
Investment through a broker: A mutual fund broker or distributor can assist you in the investment process and provide information on various schemes, required documents, etc. They may charge a fee, which will be deducted from the investment amount.
Online through the fund house’s official website: Most fund houses offer online investment options through their official website. The process involves following instructions, filling in the information, and submitting it. The KYC process can also be done online using your Aadhaar number and PAN.
Investment through an app: Some fund houses allow investments to be made through a mobile app. The online platforms enable investors to invest in mutual funds, buy or sell units, view account statements, and check folio details. Some apps like myCAMS and Karvy allow access to all investments from multiple fund houses on one platform.
Expenses involved in investing in Mutual Funds:
The value of the fund is determined by the Net Asset Value (NAV), which is the worth of the fund’s portfolio after subtracting expenses. This calculation is performed daily by the Asset Management Company (AMC).
AMCs will also charge an administration fee to cover their costs such as salaries, brokerage, advertising, etc. This fee is usually expressed as an expense ratio, with a lower ratio indicating lower costs for investing.
Loads, which are essentially sales charges for distribution expenses, may also be imposed by AMCs.
To avoid being caught off guard by these expenses, it is important to thoroughly read the details on fees and costs associated with the Mutual Fund before making an investment, as overlooking these charges could significantly reduce the profits from your investment.
Understanding Capital Gains
Before making any investment choices, it is critical to gain a comprehensive understanding of the different factors involved. One such factor is the tax impact of your investments on your short-term and long-term capital gains.
But what are capital gains? It is a term used to describe the profit made from the sale of a capital asset, such as stocks, real estate, or mutual funds, that has increased in value over time. Capital gains can be either short-term (if the asset was held for one year or less) or long-term (if the asset was held for more than one year) and can have different tax implications depending on the time frame and jurisdiction in which they are realized. It is important to consider these tax implications when making investment decisions, as they can significantly impact the overall return on your investment.
In conclusion, investing in mutual funds can be a smart financial decision for individuals looking to grow their wealth over time. With the advantages of professional management, higher returns, diversification, convenience, low cost, and disciplined investing, mutual funds offer a range of benefits to investors.
By following this beginner’s guide, you now have a clear understanding and can start your investment journey with confidence. Remember to always do your due diligence and seek the help of a financial advisor if needed.
Start investing today and watch your wealth grow.