How to Invest in Mutual Funds – A Beginner’s Guide to Investing in Mutual Funds

If you’re new to investing, mutual funds might initially feel overwhelming. I get it. There’s a lot to wrap your head around. But once you understand the basics, it’s a terrific way to grow your money. Let’s break it down step by step.

How Do Mutual Funds Work?

Imagine a mutual fund as a big pot of money collected from many people like you and me. An asset management company (AMC) invests that pot in stocks, bonds, or other assets, depending on the fund’s goal. The idea is to pool everyone’s cash to make investments that might be tough to do solo.

A pro called a fund manager runs the show. They’re like the ship's captain, someone with a solid track record and a deep understanding of the markets. Their job? I want to invest that money smartly and aim for the best returns possible while sticking to the fund’s plan. The AMC charges a small fee for this, called the expense ratio, which is just the cost of having someone manage your money.

So, how do you make money? You can earn through regular dividends, interest, or capital gains when the fund’s value grows. You’ve got options here: reinvest those gains to let your money compound the growth option or take the cash as a steady income, the IDCW option.

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 mutual fund schemes and portfolio rebalancing helps to keep returns in line with expectations.

Why Should You Consider Mutual Funds?

Investing in mutual funds is easier than you might think. You can start small, like Rs 100 monthly, through a Systematic Investment Plan (SIP) or a one-time lump sum. Most other investments don’t let you dip your toes in for that little.

Plus, it’s flexible. You can switch between funds or tweak your portfolio to match your goals. And if you’re worried about taxes, mutual funds like the Equity Linked Savings Scheme or ELSS can save you up to Rs 1.5 lakh a year under Section 80C. ELSS is a fan favourite because it’s got higher return potential and only locks your money for three years, which is way shorter than other tax-saving options.

The best part is that you don’t need to be a market genius. A fund manager and their research team handle the heavy lifting of picking the right investments for you.

Low initial investment

You can build a diversified mutual fund portfolio by investing as low as Rs 100 a month through SIP & Lumpsum in your choice of mutual fund schemes.

You can also have the option to invest either as a lump sum or a systematic investment plan (SIP).

However, compared to lump sum investments, an SIP can lower the overall investment cost while unleashing the power of compounding benefits.

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 backed by a team of researchers.

The fund manager formulates the investment strategy for your asset allocation.

The researchers' team picks suitable securities per the fund’s investment objectives.

Tips for First-Time Investors

Set a Goal:

Before you invest, decide whether you’re investing in a house, a car, retirement, or something else. Knowing your goal and how long it takes to reach it helps you determine how much to invest and what risks you’re okay with.

Pick the Right Fund:

There are tons of mutual funds, such as equity, debt, and balance, you name it. Experts often suggest a balanced or debt fund if you're starting. They’re less risky but still give decent returns.

Narrow It Down: 

Once you’ve chosen a category, consider the fund manager’s experience, the expense ratio, and the fund's investment philosophy. Compare a few options and select the one that feels right.

Spread It Out: 

Don’t put all your eggs in one basket. Investing in a few different funds can balance things out. If one takes, the others might hold steady.

Start with SIPs: 

If you’re nervous about timing the market, go for an SIP instead of dumping a lump sum. It spreads your investment over time, so you’re not stuck buying high. Plus, this cool thing called rupee cost averaging can boost your returns down the road.

Get Your KYC Done: 

You can’t invest without completing the Know Your Customer (KYC) process. It’s a must for financial staff in India. All you need is a PAN card and proof of address. Companies like ClearTax can help you knock it out fast.

Set Up Online Banking:

Net banking makes investing a breeze. You can use a debit card or cheque but online is quicker and safer.

Ask for Help if You Need It: 

With so many funds, it can feel like a lot. If you’re stuck, a financial advisor or mutual fund distributor can point you in the right direction.

Benefits of Investing in Mutual Funds

Mutual fund investments come with specific risks. 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. This signifies that you can invest a considerable amount in a mutual fund. You can invest as per your needs and financial flow. 
  For instance, you can opt for a 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 relatively easy to buy from anywhere worldwide. Multiple asset management companies (AMC) offer and distribute funds through different channels like agents, brokerage firms, online platforms, etc.
• 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, investors can readily redeem units on any business day for overnight and liquid funds to meet their financial needs.
• Open-ended schemes are flexible and open to subscription and withdrawal on any business day.

Things to Consider as a First-Time Investor

Fix an investment goal:

Defining your financial goals and time horizon significantly affects your investments. Doing this will help you decide how much you can set aside for 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 correct category. Experts recommend a balanced or debt fund for first-time investors as it offers minimal risks and steady returns.

Shortlist and choose one mutual fund:

You must analyse and compare many mutual fund schemes in each category 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 multiple mutual funds 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 make up for the loss, maintaining the value of your 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 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 is that it 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 without completing the Know Your Customer (KYC) process. KYC is a government regulation for most financial transactions in India that identifies the source of funds and prevents money laundering. To become KYC-compliant, you need a PAN card and proof of a valid address.

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.

Why Mutual Funds Rock:

Sure, there’s some risk involved. Nothing’s guaranteed. But mutual funds have some serious perks:

Regulated and Transparent: The Securities and Exchange Board of India (SEBI) monitors them closely, protecting you from shady activities.

Flexible: You can invest big or small, whenever it suits you. SIPs are perfect. If you’re on a salary, just set it and forget it.

Easy to Get Into: You can buy funds online or through agents, no matter where you are.

Quick Cash: Most of the Mutual Funds are open ended providing high liquidity to redeem units.

Short Lock-ins: Tax-saving funds like ELSS only tie up your cash for three years, which is way better than a 15-year PPF.