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.
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.
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.
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.
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. ClearTax 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
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:
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:
Experts suggest that your investment in mutual funds should be ideally 20% of your monthly salary. In addition, with so many online platforms today, you can choose and invest in a mutual fund online with just a few clicks.
Yes, anyone can buy mutual funds by themselves through online investment platforms. However, you can also buy them through an intermediary or broker.
The 3 types of mutual fund include equity, debt, and money market funds. However, a mutual fund can be classified into various other sub-categories.
If you invest Rs.2,000 a month in a mutual fund scheme using the SIP route for 24 months, considering the estimated rate of return on investment at 8%, you can calculate the return easily by using the formula:
Future Value = P [ (1+i)^n-1 ] * (1+i)/i.
As per SEBI guidelines, all mutual funds have to be colour-coded to help investors choose funds based on their risk appetite. Brown denotes the fund is highly risky, and yellow indicates that the fund is moderately risky. Blue shows low risk.
Some of the common mistakes to avoid are:
You may invest directly with the mutual fund house through the direct plan. You just have to visit the website of the mutual fund house and fill up your relevant details such as name, email id, mobile number and bank details.
You may complete the KYC online through eKYC where you enter the Aadhaar and PAN details. Your information would be verified at the backend and you may start investing in mutual funds after transferring money online from your bank account.
You may also invest through an online platform such as cleartax invest
No, you may invest in mutual funds directly with the mutual fund house by visiting the branch of the AMC. You just have to fill up the mutual fund application form and submit the self-attested identity and address proof for KYC compliance.
You may submit the cheque for the initial amount and you are allotted a PIN and folio number. You can also approach a mutual fund distributor and invest in the regular plan of the mutual fund.
You may invest in a direct plan of a mutual fund online through an AMC. You must fill up the registration form and complete your eKYC by submitting PAN and Aadhaar details. You may also invest through an online portal such as cleartax invest.
You may invest in a mutual fund scheme through a systematic investment plan or SIP. It is a method of investing in a mutual fund where you invest a fixed amount regularly in a mutual fund scheme of your choice. You may invest as low as Rs 500 per instalment through the SIP in the mutual fund scheme of your choice.
You may invest in a direct plan of a mutual fund either offline or online directly through the asset management company or AMC. You may visit the branch of the fund house and fill up the mutual fund application form and submit the self-attested identity and address proof along with a passport size photograph to complete your KYC.
You may invest in mutual funds through an online portal such as cleartax invest.
You may invest in US mutual funds through fund of funds (FoFs) schemes with a mutual fund house in India. It is an Indian mutual fund scheme that invests in US-based equity mutual funds.
However, they have a higher expense ratio as compared to most equity schemes. You may also invest in Indian equity schemes whose portfolio mimics a US stock market index such as S&P 500 or the Nasdaq 100.
You may invest in these fund of funds schemes through an asset management company in India. You should consider completing your KYC before investing in US mutual funds from India.
You may invest in mutual funds through a Demat account with your stock broker or through any depository participant. The mutual fund units would be held in the dematerialised form. You can buy and sell mutual fund schemes through your Demat account just like shares. It is a dematerialised account that can hold stocks, mutual funds and other securities.
ELSS investment can be done both online and offline just like regular mutual funds. You may invest in ELSS mutual funds online through online platforms such as cleartax invest.
A systematic Investment Plan or SIP is a method of investing in mutual funds. You may invest a fixed amount regularly in a mutual fund scheme of your choice. You can invest just Rs 500 per instalment in a mutual fund through the SIP.
You may invest a lump sum amount in mutual funds or even through the SIP route. You can invest just Rs 500 per instalment in the mutual fund scheme of your choice through the SIP. Consider using ClearTax Mutual Fund Returns Calculator to determine how much to invest to get Rs 3,00,000 in 3 years.
You may invest in International Mutual Funds directly through an AMC in India. It is an Indian mutual fund scheme that invests in stocks of foreign companies. However, you may consider the fund of funds schemes that invest in foreign mutual funds or whose portfolio mimics a stock market index such as the Nasdaq 100 or S&P 500.
You can invest in International Mutual Funds through an online platform such as cleartax invest.