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Mutual funds are pretty sophisticated products and being a first-time investor; you could be pretty confused. Understanding how mutual funds work is the first step towards your investment journey.

This article covers the following:

1. How do Mutual Funds work?

Mutual funds are investment havens which pool savings from several investors under a particular scheme managed by an asset management company (AMC). The pooled money is then invested in securities like equity shares, bonds according to the scheme’s investment objective. The fund manager, appointed by the AMC, manages the investment portfolio as per the market movements to create wealth for investors. The fund house charges an annual fee called expense ratio from the investors to manage their portfolio. 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.

2. Why should you invest in Mutual Funds?

Convenience

Investing in mutual funds is a simple process. It is a paperless process where you can monitor the market and make investments as per your requirement. Moreover, the facility of switching between funds and portfolio rebalancing helps in keeping your returns in line with expectations.

Low initial investment

You can have a diversified mutual fund portfolio in hand with investments as low as Rs. 500. 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 lowers the overall cost of investment while unleashing the power of compounding.

Tax-saving

Section 80C provides tax deductions on specific financial instruments, and mutual fund is 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 3 years.

Professional fund management

In mutual fund investing, your money is 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. He/she will have real-time access to the financial environment and adjusts your mutual fund portfolio accordingly.

3. Things to consider as a first-time investor

Fix an investment goal

Defining your financial goals, budget and tenure play a major role in your investments. This will help you decide how much you can set aside for investment and reevaluate your risk appetite. Investment always works best with a purpose.

Choose the right fund type

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

Shortlist and choose one mutual fund

With hundreds of mutual fund schemes within each category, you need to select the one that has performed well consistently for at least 5 years. Also, do not forget other factors like fund manager’s credentials, expense ratio, portfolio components and assets under management while at it.

Diversify your portfolio

Consider investing in more than one mutual fund (not exceeding 3). A portfolio of funds will help you diversify across instruments and investment styles. It will also even out risks – when one fund underperforms, the other makes up for it without bringing down your entire portfolio.

Go for SIPs instead of lump-sum investments

Systematic Investment Plan (SIP) is the best bet for first-time investors if you are considering to invest in equity or equity-oriented funds. While a lump sum investment can put you at the risk of catching a market peak, a SIP allows you to spread your investments over time and invest at different market levels. The benefit of rupee cost averaging that comes with SIPs also helps you earn higher returns over the long-term.

If you have a significant amount to invest, you can invest it entirely in a debt fund and start a systematic transfer plan (STP) to an equity fund.

Keep KYC documents updated

You cannot invest in a mutual fund if you are not Know Your Customer (KYC) compliant. KYC is a government regulation for most financial transactions in India. To become KYC-compliant, you need your PAN card and valid address proof. ClearTax helps you.

Open a Net Banking Account.

To invest in mutual funds, you will also need an Internet Banking Account. Mutual funds allow investments to be made through debit cards and cheques, but Net Banking is a simpler and secure method to make investments.

Seek advice from a mutual fund expert

The entire process of investing in a mutual fund detailed above can be tedious and overwhelming. With thousands of mutual funds to choose from, the performance of the funds also has to be monitored well. In some cases, you may also have to switch from under-performing funds. Get the services of a mutual fund expert and distributor, if you find choosing the best mutual funds is tiresome.

4. How to Invest in Mutual Funds?

You can invest in Mutual Funds in a paperless and hassle-free manner at ClearTax. Follow these simple steps to start your investment journey right away:

Step 1: Sign up for an account at cleartax.in

Step 2: You need to enter your details like the amount of investment and investment period

Step 3: Get your e-KYC done in less than 5 minutes

Step4: Invest in your favourite mutual fund from amongst the hand-picked mutual funds

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