How To Invest In Mutual Funds: Beginners Guide to Mutual Fund Investment

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The stock markets can be overwhelming for a new investor. The volatility of the markets is not everyone’s cup of tea. But the potential for returns are great, or so you’ve heard. But then you think you simply don’t have the stomach for that kind of risk. Or maybe you don’t have the time to monitor the market blow-by-blow, or simply are not good at number-crunching, but are keen to explore the equity market.

Fret not, mutual funds provide you safe entry to the world of equities sans the high risk. You get portfolio diversification within a single product and can also breathe easy on the fact that there is a professional fund manager in charge of your money.  Let’s dig deeper for a clear and strong understanding of mutual funds.

The article covers:

Overview of investing in mutual funds 

Mutual fund is professional portfolio management at a large scale to invest your money in varied investment vehicles. A small fish cannot scare away a big fish, but when a small fish joins in a large group, they can take on a big fish together and united. Through mutual funds, you are basically joining a large group of small investors to build a corpus to invest in a combination of stocks, bonds and other securities. 

How mutual funds work 

Mutual Funds are essentially pooled capital investments. This means, the fund is collected from many investors and the pooled capital is invested in various well-researched and hand-picked assets and asset classes by a fund manager. The goal of the fund manager is to generate high returns for the investors. 

The asset management company (AMC) you choose for buying a mutual fund will allot you the MF units based on the NAV of the mutual fund. NAV stands for Net Asset Value, and indicates the inherent value of the fund. For instance, when you invest Rs 5,000 in a mutual fund with Rs 100 NAV, you will get 50 units of that mutual fund. This is similar to buying shares at a particular price. The difference is, when you invest in equity, you buy partial ownership of that company, but when you invest in a mutual fund, you buy partial ownership of the mutual fund company or AMC. So you not only benefit when your fund holdings increase or when you earn a dividend, but also as your AMC posts profits (The NAV would likely increase). 

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Types of mutual funds

Based on investment amount, horizon, risk appetite, goals and tenure, you can choose among various types of mutual funds. Lest we forget, opportunity and risk come in pairs. 

Equity funds

Principally investing in stocks, there are small-cap, mid-cap, large-cap or multi-cap equity funds, classified based on the proportion of assets they allocate to equity as an asset class According to SEBI guidelines, a fund investing at least 65% of its resources in equity is classified as an equity-oriented mutual fund.

Fixed-income funds or debt funds

With an assured rate of interest and reduced exposure to risk, fixed-income funds or debt funds invest a majority portion of their assets in the debt market. With lesser returns but the safety of capital, the risk-averse investor generally prefers this kind of fund.

Balanced funds

When you are dead set on achieving goals but have low-risk capacity, the game plan is to go for balanced funds that fuse stocks, bonds and money market instruments together for a balanced return. 

Money Market Funds

For a safe place to park your money for the short-term and get returns a little higher than your savings account, money market funds are a hit with investors who are sure to remain away from the stock market. 

Why should you invest in mutual funds?

How many millionaires do you know who turned rich by investing in savings accounts? Investing can be zero-chill when you aren’t a natural with stock picking, but take tips from creepy brokers and agents with a pinch of salt. A mutual fund is a financial basket for you when you don’t have time or expertise to track the markets, lack a huge corpus to invest, need a tax waiver and expect your investments to be liquid.

Factors that make mutual funds a preferred investment vehicle for a millennial are: 

Diversification: Diversification among various sectors, instruments and companies curtails the risk and enhances the expected portfolio returns. 

Liquidity: Open-ended mutual funds are highly liquid and you can exit the investment scheme if you ever find yourself in a spot. 

Economies of scale: Diversified portfolio management can eat up a good chunk of your investment in the name of processing and transaction fees, charges, and brokerage. Buying a mutual fund, on the contrary, is like a bulk deal that provides economies of scale. 

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Professional management: Mutual funds are developed based on meticulous research, analysis and experience. A professional fund manager skilfully hand-picks stocks and bonds to suit your goal and tenure. It saves you from buyer’s remorse and financial myopia. 

Transparency: One of the most transparent investment tools, mutual funds share complete information about fund manager’s portfolio choices. SEBI also plays an active role with norms in place to ensure transparency, fairness and accountability to investors. 

Things to consider as a first-time investor

First things first- know your purpose of investment. Once you know what you need the funds for, you can choose your fund based on lock-in period, risk-reward ratio and payment mode. 

Next, there are certain documents that you will need to invest in a mutual fund scheme. Documents like PAN card, passport-sized photograph, proof of address, proof of birth and a cancelled cheque are the prerequisites to start investing in a mutual fund. KYC is another compliance that you need to fulfil. 

Once you have your documents in place, you can either select the scheme or take help from a mutual fund advisor to choose between various schemes, options and strategies. If you want to evaluate mutual funds yourself, consider using Tickertape’s Mutual Fund Pages that have all the information you need to evaluate a scheme before investing in it.

Since investments are subject to market risks; always consider your risk-bearing capacity before choosing an investment plan. There are mutual funds designed with different risk-reward ratios to suit the risk profile of the investors. 

Ways to invest in mutual funds 

Now that you are ready to take a plunge into the pool of mutual funds, get your ducks in a row and choose the most suitable way to invest. 

Traditional brokerage firm: You can buy a mutual fund directly from a fund house offline. Visit the nearby branch or touch base with the executive for initiating the paperwork. 

Online brokerage firm: Most brokerage firms, AMCs and banks offer an online facility for buying mutual funds. Visit the official website of the fund house or bank of your choice and initiate the process for account opening. 

Through an app: Investment apps of AMCs and banks have interactive user interfaces with simple-to-use features for investing, tracking and managing your investments through a mobile app in a faster and easier way. 

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Steps on how to invest in mutual funds

Most investors these days prefer the online mode for investing in mutual funds, owing to ease of access, transparency and control. Follow these simple steps on how to invest in mutual funds:

Step #1: Visitation

Whether you choose an AMC, a bank or a brokerage firm, visit the official website or download the app through Google Play or App Store on your device. 

Step #2: Documentation

Complete your e-KYC, upload the required documents and digitally submit it along with filling the online form.

Step #3: Verification

Complete the in-Person Verification (IPV) by either visiting the nearest branch or online through a video conference using your webcam. 

Step #4: Fund selection

Depending upon your investment amount, risk appetite, duration and fund pricing, choose the fund you would want to invest in. 

Step #5: Application  

The final submission of your form after e-KYC, IPV, fund selection and making the payment will initiate your process for investing in a mutual fund of your choice. 

And one more thing…

Analyse your purpose of investment, your risk-bearing capacity and your goal before you select a mutual fund. Although mutual funds are considered a much safer investment tool, the risk factor can never be overlooked. So evaluate the risk-return characteristics of your fund carefully before investing. 

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