Thinking of investing in mutual funds?
Investing in mutual funds is a great way to diversify your portfolio and generate wealth in long-term. This is important to accomplish our financial goals. You can have a goal like buying a house or a car, financing children’s education or marriage, building corpus for retirement or creating an extra source of regular income.
A mutual fund is an investment vehicle to invest money pooled from a number of investors in a portfolio of assets like stocks, bonds and money market instruments with a defined investment objective.
Investors get returns from mutual fund investing in the form of dividends and capital gains from appreciation in prices of underlying assets.
With our easy-to-follow guide, you’ll learn how to invest in mutual funds, understand the basics of investing, and make your first mutual fund investment.
Table of Contents Hide
- Research and Choose Mutual Funds
- Understand Different Types of Mutual Funds
- Begin Investing in Your Chosen Funds
- Evaluate Your Portfolio Performance Regularly
- Take Advantage of Opportunities to Rebalance Your Portfolio
- Final Thoughts
Research and Choose Mutual Funds
Once you have decided to invest into mutual funds, the next step is to research and select the right funds to meet your financial goals. This process involves making informed choices based on reviews, analysis, and ratings of individual funds.
Additionally, pay attention to minimum investments, fees, and other associated costs. When considering a fund for investment, make sure that it has the potential for growth and that it suits your long-term objectives.
An experienced financial planner can help you choose a suitable fund for some fee. A mutual fund distributor can also help you choose a fund scheme and assist you in executing transaction for investing. The asset management companies (AMCs) pay these distributors in the form of commissions for their services.
Understand Different Types of Mutual Funds
Mutual funds are categorized based upon different characteristics or objectives. It is important to understand various types of mutual funds to take informed decision regarding investment.
Depending upon portfolio management, mutual funds are of two types – actively managed and passively managed funds.
Actively managed mutual funds involve a skilled fund manager who continuously monitors the markets and makes decisions on when to buy and sell investments to consistently generate returns. This makes them suitable for risk-tolerant investors. These fund managers are hired by AMCs. These funds have higher expenses.
On the other hand, passively managed mutual funds are less expensive as no active selection of securities involved here. They include index funds that track/replicate an index on the stock market with minimal volatility. These mutual funds are ideal for investors looking for long-term growth with minimal risk.
Mutual funds are divided into 5 categories to make them easy to understand for common investors. These are equity funds, debt funds, hybrid funds, solution oriented funds and other funds (index funds, fund of funds). Each category has its further subcategories.
Further, mutual funds have regular plans and direct plans. Regular plans include distributor charges apart from other expenses. Investing in direct plans don’t involve any intermediary or distributor, hence their expenses are slightly less than regular plans.
Begin Investing in Your Chosen Funds
Now that you’ve done your research and chosen the mutual funds that are best suited to meet your financial goals, it’s time to get started investing.
Decide the amount and your investment time period to invest in a mutual fund. Further, choose whether you want to invest the amount in lump sum or in instalments through a systematic investment plan or SIP.
Before doing so, make sure you have checked the fund’s fees and expenses as well as their past performance data.
Know your customer or KYC compliance is compulsory for mutual fund investing. This is a one-time process. If not done already, Your KYC application is processed at the time of investment application.
You can do your KYC either physically or through online mode (e-KYC). It requires your identity proof, address proof (driving license, passport, voter card, AADHAAR card) and PAN card. PAN card is exempt for individuals investing less then Rs.50,000 per year.
There are different ways to invest in mutual funds-
You can invest into mutual funds physically by submitting a duly completed application form. Accompany this form along with a bank draft or cheque. Submit your application at branch office or designated investor service centers or registrar and transfer agents of respective mutual funds.
Through Financial Intermediary
You can also invest in a mutual fund scheme through a financial intermediary, such as a mutual fund distributor. The distributor can be an individual or non-individual such as a brokering house or a bank.
You may also choose to invest in mutual fund online through website or mobile app of concerned mutual fund or through a demat account.
First time investors need to register on the website and also complete their KYC If not done already. After entering the asked particulars of the investor, a portfolio is created on successful transaction while investing.
Existing investors with the same mutual fund may invest in their existing portfolio or create a new portfolio for new investments.
You may also invest either online mode or conventional paper-based mode through MF utilities Private Limited (MFU). This is a technology-based shared platform and is promoted by participating mutual funds for transactions.
Through NSE-MFSS and BSE-StAR MF
How to Invest in Mutual Funds Direct Plans
You may invest in mutual funds direct plans online through websites of the mutual fund or by submitting your application in physical mode at investor centers. You should choose the direct plan scheme of the mutual fund and leave the ARN code or EUIN code box empty and tick the consent box in the application form.
Evaluate Your Portfolio Performance Regularly
Once you’ve invested in mutual funds, it is important to assess the performance of your investments over time.
The performance of portfolio is seen by comparing funds to the benchmarks. Benchmarking enables you to compare the performance of your mutual fund investment to the market competitors.
Past performance is not a good predictor of future performance of a fund.
The performance of your mutual fund in the same category is measured by its relative performance to its peers. The ability of stocks in the portfolio to provide higher returns on money invested for a specific length of time indicates their quality. The quality of the assets in the portfolio will be revealed in the returns, and hence the performance.
Evaluate the performance of each fund. In addition to tracking individual funds, make sure that your overall portfolio properly expresses the investment goals that you identified at the beginning.
It is important to be proactive when making any changes to the mix of investments in order to keep your portfolio well balanced.
Take Advantage of Opportunities to Rebalance Your Portfolio
Rebalancing is the process of re-assessing your portfolio and making sure that it meets your investment goals. This involves making sure that you don’t have too much money invested in one fund or sector, and also considering how many different funds you should be holding.
You may have noticed the disclaimer that a fund’s past performance is no guarantee of future performance. It means that you can’t expect a specific rate of return on your investment. As a result, you must go beyond previous years’ success while analyzing a mutual fund.
To begin, you should keep track of your investments so that you can make informed decisions that will increase your profits. A change in fund management or the fundamental features of your fund may also prompt an evaluation. As a result, a review and rebalancing of the portfolio may be required to maintain the risk profile.
The stock market is prone to swings. That does not, however, imply that you must evaluate the fund’s performance on a daily basis. Depending on the time duration of the investment, you should examine your fund every six months to a year. A shorter time of evaluation does not provide an accurate picture of the success of your assets.
You may need to adjust or sell some of your investments in order to achieve the desired mix. Regular rebalancing helps to maximize gains and minimize losses, so keep track and make the necessary adjustments whenever needed.
Is Investing in Mutual Funds Safe?
Mutual funds are relatively safe mode of investment. Broadly, there are two types of risks to an investment- market related and company related.
As for market related risks, all investments carry inherent risk. However, choosing an appropriate mutual fund scheme, diversification and taking long term horizon for investment reduces risk considerably. This ensures the benefits of mutual funds outweigh the risks.
For company related risk, the asset management companies and all the involved intermediaries are well regulated by market regulators- Securities and Exchange Board of India (SEBI) and Association of Mutual Funds of India (AMFI) to protect investor’s interests.
Best Way to Invest in Mutual Funds
The best way to invest in mutual funds is choosing right investment amount, investment duration and mutual fund scheme as per your goal and risk profile and the easy mode of investing.
As for regarding the right amount, duration and scheme, you can decide for it yourselves if you are informed enough. Otherwise, you should consult the experts in the field. Online mode is very convenient and easy if you have basic knowledge of working on computers.
Investing in mutual funds is a great way to generate wealth in the long run. They are especially important if you want to invest in stock market without investing directly in stocks.
The question how to invest in mutual funds involves whole process of making an investment plan, researching the appropriate fund scheme, executing it through the most convenient mode of transaction and last but not the least, the continuous evaluation of your investment portfolio if it is achieving its goal.