Want to start investing in mutual funds? Trying to figure out how to invest in mutual funds but finding all the jargon like KYC, Asset management Company, SIP, Portfolio manager etc? Don’t know how to open a mutual fund account? We shall try and answer these questions for you today.
With interest rates of conventional savings schemes like FDs and RDs now below 6% almost everywhere, investing your money in other more profitable schemes like equity or mutual funds has become the sensible way to go for many young indians. But with only about 1% of our population actively or passively engaged with the markets, a lot of questions naturally arise around starting these investments.
But first of all, what exactly are mutual funds and how do they function? Investing in any mutual fund is basically like letting the fund manager select a group of stocks on your behalf based on research to diversify the portfolio. It allows an investor to skip the work of stock and bond picking.
Benefits of Investing in Mutual Funds
Investments as small as Rs 500 can be made. This is made possible by the provision of SIPs over any period of time that you might want to invest in.
You can start a systematic investment plan in which you invest a given sum of money periodically ( usually monthly) and do not need to invest all the capital right in the start. This makes it possible for people with smaller incomes to invest and participate in the markets as well.
You get the ability to invest in multiple asset classes like equity, commodities, govt bonds, debt etc. This allows you to hedge ( protect yourself from sudden movements in the markets) without the need for very large capitals that would otherwise be needed to hedge your investments effectively.
No DEMAT Account Needed
While investing in markets directly through buying equities or derivatives requires you to get through the painstaking process of starting and learning how to manage a DEMAT Account, in mutual funds all you need to do is give your money to the fund managers who then invest it for you. Hence your job ends at picking the right fund for yourself
Under section 80C of the IT act, tax deductions of upto rs 1.5 lakh per annum are given for investment classes that also include mutual funds. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option inn the last few years because they have the shortest lock in period in all the 80C options and also give a high return to the investor
Now that we have covered the benefits, how do you go ahead with your first mutual fund investment?
How to Start Investing in Mutual Funds
Step 1: Open a net banking account if you don't already have one. This will help streamline your investment process.
Step 2: Keep your KYC (know your customer) documents updated, they will be needed while starting your investments with any AMC.
Step 3: Research the class and the particular mutual fund you want to invest in. It is advised to have a diversified portfolio of mutual funds with funds that invest in multiple asset classes.
Step 4: Reach out to the Asset Management company whose fund you want to invest in.
There are also many online intermediary platforms (like Upstox, Zerodha, PayTM) that let you pick and invest in a mutual fund of your choice with a lot of convenience. It is entirely your choice to invest individually or through an intermediary like a stock broker. If you are confident in your analysis and want to save any fees the intermediary might take, invest directly. However if you are not so sure and need some advice, going through a well reputed intermediary is highly recommended as it might save you from making some bad investments.
Types of Mutual Funds
There are 3 broad categories that most mutual funds will fall in, Debt, Equity and Hybrid.
Debt funds as the name suggests deal in the debt market (bonds issued by govt, PSUs banks, ETFs, commodities etc) and are relatively low risk but also low reward. So if you’re looking for something with small but decent returns, don’t have a large risk appetite or are willing to wait very long for compounding to show its magic. This is the one for you.
Next is the equity funds, the favorites of young investors with large risk appetites and the motivation to amass substantial wealth for themselves. These are the highest risk and reward funds among the three. They are further classified according to which equity class they invest in (Large Cap, Mid Cap, Small Cap) and the wisest among the lot is to invest in a fund which has a balanced portfolio of mid cap and large cap stocks as it offers a good risk to reward ratio.
The next is a hybrid fund that invests in a mix of the above two classes. This is most popular among people who are just entering the investment game and because the conventional saving methods (FDs and RDs) are offering too low an ROI now. These are most suited for people in their middle ages trying to get the most out of their buck without exposing themselves to too much risk.
Start Investing in Mutual Funds - Frequently Asked Questions (FAQs)
1. Should I go for an SIP or a lump sum investment?
It is always more advisable to go for an SIP, this is because it helps you distribute your capital payment over multiple installments, by doing this you are saved from catching a market high and potentially seeing huge losses thereafter.
2. What is an NAV?
The performance of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV). Mutual funds invest the money collected from the investors in securities markets. In simple words, Net Asset Value is the market value of the securities held by the scheme. Since market value of securities changes every day, NAV of a scheme also varies on day to day basis. In the simplest of terms it is the equivalent of the stock price of an equity for a mutual fund and can be used to perform technical and fundamental analysis.
3. Do I need to pay anything to the distributor who sells me mutual fund schemes?
No entry load can be charged for any mutual fund scheme. An investor can chose to pay a distributor based on the investor's assessment of various factors including the service rendered by the distributor. However, for investments made through a distributor, commission is paid directly by AMC to the distributor such that the total expense ratio for an investor is within the limits on expense ratio specified under regulation 52 of the SEBI (Mutual Funds) Regulations, 1996. Hence, the cost borne by investors remains within the limit prescribed under SEBI Regulations.
4. What shooul you look at in the offer document?
An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor's track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed.
5. Where do I look for information on mutual funds?
Investors can access information like NAVs, portfolios and yearly reports of all mutual funds at the association of mutual funds in india website.