How to Invest in mutual funds – Mutual Funds Investment Guide for Beginners

Mutual funds investment may seem complicated for first-time investors as it can be confusing at times. Understanding how mutual funds work is the first step in your investment journey.

You can invest as low as Rs 500 in a mutual fund through SIP, which may not be possible with most other investment options. There are several mutual funds available, and you may invest in funds whose investment objectives and risk levels are in sync with your risk profile.

How do Mutual Funds work

A mutual fund is formed when an asset management company (AMC) pools investments from various individuals and institutional investors with common investment objectives. A fund manager professionally manages the pooled investment by strategically investing in securities to generate maximum returns for the investors in line with the investment objectives of the fund.

Fund managers are professionals with an excellent track record of managing investments and have an in-depth understanding of markets. The fund houses charge an expense ratio, which is the annual fee to manage the mutual fund.

The investors make money through regular dividends/interest and capital appreciation. They can either choose to reinvest the capital gains via a growth option or earn a steady income by way of a dividend option. Click here to understand the most commonly used terms in the mutual fund industry.

Why should you invest in Mutual Funds

Convenience

Investing in Mutual Funds is a paperless and straightforward process. Investors can monitor the market and make investments as per their requirements. Moreover, switching between mutual fund schemes and portfolio rebalancing helps to keep returns in line with expectations.

Low initial investment

You can build a diversified mutual fund portfolio by investing as low as Rs 500 a month through SIP in mutual fund schemes of your choice. You also have the option to invest either as a lump sum or a systematic investment plan (SIP). However, when compared to lump sum investments, a SIP is capable of lowering the overall cost of investment while unleashing the power of compounding benefit.

Tax-saving

You get tax deductions under Section 80C of the IT, Act up to a maximum of Rs 1.5 lakh per financial year, for specific financial instruments, and tax-saving mutual funds are one of them. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for Indians in the last few years, owing to its higher returns and the shortest lock-in period of three years among all Section 80C options.

Professional fund management

Your mutual fund investments are managed by a professional fund manager who is backed by a team of researchers. The fund manager formulates the investment strategy for your asset allocation. The team of researchers picks suitable securities as per the fund’s investment objectives.

Things to Consider as a First Time Investor

Fix an investment goal

Defining your financial goals, budget, and time horizon plays a significant role in your investments. Doing this will help you decide how much you can set aside towards investing and you must also invest based on your risk profile. Investment always works best when done with a purpose.

Choose the right fund type

It takes more than reading about different mutual fund types to decide on the right category. Experts typically recommend a balanced or debt fund for first-time investors as it comes with minimal risks while offering steady returns.

Shortlist and choose one mutual fund

With a plethora of mutual fund schemes in each category, you need to analyse and compare them to pick the right investment. Investors should not ignore factors such as the fund manager’s credentials, expense ratio, portfolio components, and assets under management.

Diversify your portfolio

Consider investing in more than one mutual fund to diversify your portfolio and earn risk-adjusted returns. A portfolio of funds will help you diversify across asset classes and investment styles. It will also even out risks – when one mutual fund underperforms, as the other funds makes up for the loss maintaining the value of your portfolio. Read here to know more about building a portfolio.

Go for SIPs instead of lump-sum investments

Investing via systematic investment plans (SIP) is advisable for those investing in equity instruments for the first time. While a lump sum investment can put you at the risk of catching a stock market peak, SIP allows you to spread your investments over time and invest across market levels. The benefit of rupee cost averaging that comes with SIPs also helps you average out the cost of your investment and earn higher returns over the long-term.

Keep KYC documents updated

You cannot invest in a mutual fund if you have not completed the Know Your Customer (KYC) process. KYC is a government regulation for most financial transactions in India to identify the source of funds and prevent money laundering. To become KYC-compliant, you need a PAN card and valid address proof. EasyTax helps you there.

Open a Net Banking Account

To invest in mutual funds, you must activate internet banking on your bank account. Mutual funds also allow investments to be made through debit cards and cheques, but doing it via net banking is a more straightforward, fast and secure process to make investments.

Seek advice from a financial advisor

The entire process of investing in a mutual fund can be tedious and overwhelming. With thousands of mutual funds to choose from, the performance of the funds also has to be monitored. Get the services of a mutual fund expert or distributor, if you find choosing the right mutual funds a herculean task

Benefits of Investing in Mutual Funds

Mutual fund investments come with certain risk. But it can be highly advantageous in various ways. In addition, knowing the golden rules of investing in a mutual fund can further save you from undue risks, thus creating opportunities for long-term wealth creation. The following are the benefits of mutual funds:

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI). Accordingly, as per SEBI Regulations, 1966, strict guidelines are laid to ensure transparency with an appropriate risk mitigation framework, keeping investor protection and fair valuation standards in mind.
A mutual fund is flexible in nature. This signifies that you can put in a considerable amount to invest in a mutual fund. You can invest as per your need and financial flow. For instance, you can opt for SIP or Systematic Investment Plan if you are a salaried individual. With the help of SIP, a fixed amount is invested periodically (monthly, for example) depending on your budget and convenience.
Mutual funds are easily accessible and are quite easy to buy from anywhere in the world. Multiple asset management companies (AMC) offer funds and distribute them through different channels like agents, brokerage firms, online platforms, and many more.
The lock-in period of tax-saving mutual funds like ELSS is only 3 years. This is lower than other tax-saving options like PPF, FD, ULIPs, etc.
It allows easy redemption depending upon the type of scheme. For instance, for overnight and liquid funds, investors can readily redeem units on any business day to meet their financial needs.
Open ended schemes are very flexible as they are open to subscription and withdrawal on any given business day.