A first-time investor’s anxiety and doubts know no bounds.
Is it too early/late to invest in Mutual Fund A? What if I want to switch to Mutual Fund B? Are share units too costly? Will the stocks manifest a steady upward growth for, say, another three years as one analyst predicted recently? What will survive in a market crash? What is the best investment to save tax?
These questions are never-ending and get thrown around often by novice investors. It is hard not to, when we are surrounded by both online and offline mutual fund promotions all the time. Even government regulators and associations like SEBI and AMFI run campaigns on mutual funds from time to time to spread awareness about mutual funds and inculcate positive investment habits in people.
Understand Why Mutual Fund Investment is Important
Save for future (short-term or long-term)
Tax-saving mutual fund, ELSS, has been historically delivering 15-18% returns. The earnings from interest as well as compounding with added tax benefits ensure that your money gets nearly doubled after a certain tenure, compared to other investment options like FD.
Save on taxes
Section 80-C exempts certain financial instruments from taxation and mutual fund is one of them. ELSS has become a popular tax-saving option for Indians in the last few years, owing to its higher returns and the lowest lock-in period of 3 years.
Save on time & effort
Mutual funds are flexible and liquid investments; you can invest and redeem any time you want (except for ELSS). Your money is managed by a fund manager who will send you regular updates on fund performances.
First-time investors, remember these 8 points
Fix an investment goal
Defining your financial goal in terms of objective, budget and tenure can go a long way. This can help you decide how much you can set aside for a mutual fund and figure out your risk appetite. Investment always work best with a purpose.
Choose the right type
It takes more than reading about different mutual fund types to decide on a suitable mutual fund category. Experts normally recommend a balanced or debt fund for first-time investors as it comes with minimal risks while giving you higher returns than, say, FD.
Shortlist and choose one
With hundreds of mutual fund schemes within each category, you need to select one that has performed well consistently for at least 5 years. Don’t forget other factors like fund manager’s credentials, expense ratio, portfolio components and assets under management while at it.
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 better for novices if investing in equity or equity-oriented funds. While a lump sum investment can put you at the risk of catching a market peak, an 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 big 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 in order
You cannot invest in a mutual fund if you are not KYC-compliant. KYC or Know Your Customer is a government regulation for most financial transactions in India. To become KYC-compliant, you need your PAN card and valid address proof.
Have a NetBanking Account
To invest in mutual funds, you will also need an Internet Banking Account. Mutual funds allow investments to be done through debit cards and cheques, but a NetBanking account is the easiest and safest option.
Seek advice from a mutual fund expert
The entire process of investing in a mutual fund detailed above can be tedious and overwhelming. First, there are thousands of mutual funds to choose from and once bought, the mutual fund’s performance has to be periodically monitored. You might need to switch from under-performing funds. Get the services of a mutual fund expert and distributor, if all this is too much for you.
How ClearTax Can help you
A good fund distributor will help you assess your requirements based on your risk profile and investment goals. The distributor will help you build a portfolio of funds and monitor them for you. And the distributor will also help you get your documents and compliance in place. If a distributor is what you need, check out the ClearTax Investment Platform. You can invest online securely in the best funds in a matter of minutes.
This is how you can begin investing in mutual funds. As you can see, it is not as difficult as it seems to be and becomes simpler with time.