A Perfect Guide on Investing in Mutual funds for Beginners

Investment in mutual funds is one of the better options available to you as an investor with a long term perspective. However, as there are a plethora of mutual fund houses offering innumerable schemes, it often becomes difficult for you to select a suitable scheme meeting your investment goals.

What is a Mutual Fund
Why invest in mutual funds?
Various options on how to invest in mutual funds
How to invest in mutual funds through direct plans of mutual funds?
How to invest in mutual funds through an independent financial advisor?
How to invest in mutual funds through Wealth Management Firm?
How to invest in mutual funds through your bank?
How to invest in mutual funds through online broker firms?
Deciding on how to invest in mutual funds
What are the points to remember as a first-time investor?

First of all, let’s see what is a mutual fund.

What is a Mutual Fund?

A mutual fund is an investment product where the funds of many investors are combined into an investment product. This amount is then invested according to the investment objective. It could be in stocks, bonds, money market instruments, etc. The combined holdings of the mutual funds are called a portfolio.

“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” – Scott D.Cook

These funds are managed by the fund managers. They invest to multiply the amount for investors. The Asset Management Companies (AMC’s) charge an expense ratio which is the yearly maintenance fee to manage the investment. The investors earn regular dividends or interest from capital gains.

Now let’s see why you should invest in mutual funds or the advantages of mutual funds.

Why invest in mutual funds?

1. Higher returns

Mutual funds offer better returns compared to term deposits such as Fixed deposits, Recurring deposits, etc. Hence this is one reason why people invest in mutual funds.

2. Convenience

Mutual funds have been made simple, quick, and hassle-free by online investments. It has become a paperless process. You can monitor the market and make investments as per your needs. Even the KYC process can be done online.

3. Discipline in investing

To cultivate regular investing, mutual funds offer a facility known as SIP (Systematic Investment Plan). Here you can invest small amounts regularly. The frequency could be weekly, monthly, or quarterly. An auto-debit facility can also be done where a fixed sum will be automatically debited from your bank account every month towards your SIP.

4. Diversification

Mutual funds reduce the risk by diversifying the portfolio. Even if one underperforms, the performance of other assets can balance it and you can still enjoy the returns.

5. Low Initial investment

You can start your initial investment with just Rs.500 per month in SIP. You either have the option to invest in a lump sum or SIP. However, SIP can lower the overall cost of investment.

6. Tax saving

There is a tax deduction under section 80C. Equity Linked Savings Scheme (ELSS) has become a popular tax saving option for Indians as it has higher returns and the lowest lock-in period of 3 years among the other 80 C options.

7. Professional fund management

In mutual funds, your money is managed by a professional fund manager with a team of researchers. They research and keep track of the markets, find the right stocks, and buy and sell at the right time to generate returns on your investment. The fund manager formulates the investment strategy for your asset allocation and also analyses the performance of the firms before investing in their stocks.

Also when you buy units of mutual funds, the Scheme Information Document (SID) will have the professional summary of the fund manager. It contains information such as:

Investment objective
Investment strategies
Benchmark index for the scheme
Asset allocation pattern
Fees and expenses
Risk involved
Fund manager’s details such as the work experience, the kinds of funds managed, and the performance of the funds managed by him.

This can make you confident about your money that it is in the right hands.

8. Saves time

Since a professional fund manager manages your money, it saves your time and hence you
don’t have to worry about managing your investments or researching about the investments.

9. Liquidity

You can redeem your shares at any time, as most of the mutual funds do not have a lock-in period. The redemption requests are also processed quickly and your money would be credited in just 3 to 7 days.

10. Flexibility

You can easily shift investments from one fund to another.

11. Transparency

There is transparency as you get to know where the money exactly gets invested.

12. Regulated

Mutual fund houses and plans are regulated and are controlled by the SEBI. Association of Mutual Funds in India (AMFI) also governs the fund plans.

13. Varieties to choose from

Over 1000 mutual fund schemes are available and you can choose as per your investment objective and risk appetite.

14. Easy tracking

Fund houses provide regular statements of their investments. With this, it becomes easy for you to track and make decisions accordingly.

Now let’s see the various options to invest in mutual funds.

Various options on How to invest in mutual funds

For this, you may not worry as there are at least five channels are available to whom you may approach for selecting the right mutual funds’ products to meet your investment needs. The options available to you are an independent financial adviser, or a wealth management firm, or your bank, or the online broker/ online fund adviser or directly into a mutual fund either via their online/mobile platform or in physical form.

Let us discuss how to invest in mutual funds through different channels and which channel suits you most.

First of all, you need to decide whether you want to invest mutual funds directly or indirectly.

How to Invest in Mutual Funds through Direct Plans of Mutual Funds?

The new direct plan option enables you to buy your scheme directly from the fund house and you benefit from that purchase by paying a lower cost. The Securities and Exchange Board of India (SEBI) has made it mandatory for all asset management companies (AMCs) to offer separate direct plans for open-end schemes, effective from 1 January 2013. As there is no marketing or distribution expense, the direct plan net asset value(NAV) is higher than the normal plan’s NAV which can be around 0.25-0.50% annually.

You can take advantage of the lower cost only when you know which open-ended scheme is good for you. There are no expert advice available on which MF product to buy along with no long term financial planning services.

If you would like to invest in mutual funds through an intermediary, then you are left with the following 4 choices.

How to Invest in Mutual Funds through an Independent Financial Advisor?

If you are a busy person and have less time to think about your investment goals and investment products, an Independent Financial Advisor will be the most suitable medium for you. The Independent Financial Advisor will be able to actually advise you on your financial planning with short, medium, and long term investment goals and help you find suitable mutual funds products for you against a fee, which will be competitive.

The other advantage is that over time you develop trust and with higher comfort levels leading to a lifelong relationship.

How to Invest in Mutual Funds through Wealth Management Firm?

Wealth Management Firm is normally a corporate entity having offices in most metro and large cities and is professionally competent to advise you the way an Independent Financial Advisor can do, sometimes, even more professionally. However, the flip side is that Wealth Management Firm will be comparatively more expensive and you may lose the personal touch you had with an Independent Financial Advisor. The advisor in Wealth Management Firm is just an employee and you may find advisors keep on changing and you may then not feel very comfortable with such a scenario.

How to Invest in Mutual Funds through your Bank?

Your bank, as most banks today are in arrangement with few mutual fund houses to sell their products. In banks, as they are mostly selling products of a few MF companies, you may not always get an MF product of your choice. Also, banks may not spend time on your financial planning and the person who advises you to buy a suitable product may be driven by his/her own business targets. Besides, the advisor would also keep changing as in banks they keep on shuffling their staff to avoid developing vested interest.

How to Invest in Mutual Funds through online broker firms?

This channel is one of the least expensive and time friendly (you may go online on your own sweet time) for you. However, the advice from such firms would be mostly passive and you may not get wholesome financial planning package services. If you are a savvy investor and you know what to buy this is a good channel for you.

Deciding on How to Invest in Mutual Funds

Among the five channels available for you to invest in mutual funds products, you may select them based on your needs. If you want wholesome financial advisory services, Independent Financial Advisor and Wealth Management Firm are better.

In case you want to select financial services, banks, online brokerage forms and direct plans of MF houses are better depending on what types of MF investments are you want to make.

Hope you have understood the different methods by which you can invest in mutual funds and you are able to decide on how to invest in mutual funds.

If you are a first-time investor of mutual funds there are a few points to remember, now let’s see what are those.

What are the points to remember as a first-time investor?

1. Update your KYC document

The first step is to complete the KYC process. Only after you complete the KYC process, you will be able to invest in mutual funds. It is a government regulation for most financial transactions in India. To be KYC compliant, you need a valid address proof, age proof, PAN card, etc.

2. Fix a target

Define your financial goals, budget, and tenure. This will help you know how much to set aside for investing. Investment works best when done with a purpose.

3. Consider risk and choose the right fund type

Schemes with higher returns often have higher risks. If you wish to take risks and also wish higher returns then you can choose equity funds. If you don’t want to take risks and are fine with moderate returns then you can choose debt funds. Experts recommend debt fund for first-time investors as it has minimal risks.

4. Choose one mutual fund

You have to analyze and compare the mutual funds to pick the right one. You should not ignore the factors such as the fund manager’s credentials, portfolio components, expense ratio, and assets under management.

5. Diversify your portfolio

Diversification will even out risks if one fund underperforms, the other makes up for the loss without bringing the value of your portfolio down.

6. Choose SIPs

If you’re investing for the first time, invest in SIP as it helps you spread your investments over time and invest at different market levels. SIPs can earn higher returns in the long run.

7. Open a net banking account

Start internet banking to invest in mutual funds. It can also be done via debit cards and cheques but net banking is more straightforward and secure.

8. Seek advice from a mutual fund expert

The entire process of investing in mutual funds can be tedious. With lots of mutual funds to choose from, the performance of the funds also has to be checked. So before investing understand the different types of schemes. Then check which suits your investment objective, risk appetite, and affordability. If you are not sure which scheme to choose, then you can get the services of the mutual fund expert.

Now, don’t you think that investing in mutual funds is really advantageous?

Also, read this link to find whether you should invest directly in mutual funds or through an advisor.

The fact is that to achieve long term financial goals investment in mutual funds is a wise decision!!! To get the right perspective about your complete personal finance, you need to have a healthy financial plan. If you want to understand our 360-degree financial planning process, we offer

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How to Invest in Mutual Funds?

Table of contents

What is a Mutual Fund?