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

1. How do Mutual Funds work?

A mutual fund is formed when an asset management company (AMC) pools investments from various individual and institutional investors with common investment objectives. A fund manager professionally manages the pooled investment by strategically investing in capital assets to generate maximum returns for the investors. Fund managers are professionals in the field of finance with an excellent track record of managing investments and have an in-depth understanding of markets. The fund houses charge expense ratio, which is the annual maintenance fee to manage investments of individuals. The investors make money through regular dividends/interest and capital gains. 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?


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 funds and portfolio rebalancing helps to keep returns in line with expectations.

Low initial investment

You can have a diversified mutual fund portfolio by investing as low as Rs 500 a month. 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.


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 three years among all Section 80C options.

Professional fund management

In mutual funds, 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 plays a significant role in your investments. Doing this will help you decide how much you can set aside towards investing and evaluating 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 providing higher 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 one. 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. 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 the loss without bringing down the worth of your entire 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 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 in earning higher returns over the long-term.

Keep KYC documents updated

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

Open a Net Banking Account.

To invest in mutual funds, you will need to 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 and secure process 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. Get the services of a mutual fund expert or distributor, if you find choosing the right mutual funds a herculean task

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: Log on to and create an investment account Step 2: Enter all the requested details Step 3: Get your e-KYC done, the whole process can be completed in 5 minutes Step4: Invest in the right mutual fund

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