How Should You Invest in Mutual Funds?
5 Easy Steps for Investing in Mutual Funds Online
Understand your risk tolerance and risk capability. Risk profiling is the process of determining the amount of risk you are willing to take.
The following phase is asset allocation. Once you’ve determined your risk tolerance, you should consider allocating your funds among several asset classes. To offset the risks, your asset allocation should ideally include a mix of both equities and debt securities.
The funds that invest in each asset class should then be identified. Mutual funds can be compared based on their investing purpose and prior performance.
Choose the mutual fund schemes in which you want to invest and apply online or offline.
Diversification of your investments and follow-ups are critical to getting the most out of your investment.
Mutual Fund Types
Mutual fund types are widely classified based on investing purpose, structure, and scheme characteristics. Mutual funds are categorised into seven groups based on their investing objectives: equities or growth funds, fixed income funds or debt funds, tax saving funds, money market or liquid funds, balanced funds, gilt funds, and exchange-traded funds (ETFs).
Mutual funds are classified into two types based on their structure: closed-ended and open-ended schemes. Mutual funds are grouped into three groups based on their nature: equity, debt, and balanced. Certain schemes, such as equity growth funds, have classification overlap since they can be classified based on investment objective as well as categorization based on nature.
The following are some examples of mutual funds:
Growth or equity schemes – These funds invest in equity shares with the goal of capital gains over the medium or long term. They are connected with high risks since they are tied to highly volatile stock markets, but they provide good long-term profits. As a result, individuals with a high risk tolerance will find these plans to be an excellent investment alternative. Diversified, sector, and index funds are the three types of growth funds.
Debt funds, also known as fixed income funds, invest in debt securities such as debentures, corporate bonds, commercial papers, government securities, and different money market instruments. Debt funds might be an excellent option for people looking for a consistent, steady, and risk-free income. Subcategories of debt funds include gilt funds, liquid funds, short-term plans, income funds, and MIPs.
Balanced funds invest in a combination of debt and equity securities. With these products, investors may expect both consistent income and growth. They are an excellent investment option for investors willing to face moderate risks over the medium or long term.
Tax Saving Schemes – Tax saving plans are available to anyone who wants to build their money while simultaneously saving taxes. Tax saving funds, commonly known as equity-linked savings schemes, allow investors to take advantage of tax breaks under Section 80C of the Income Tax Act of 1961.
Exchange-Traded Funds (ETFs) – An ETF is a stock exchange-traded fund that owns a portfolio of assets such as bonds, gold bars, oil futures, foreign currency, and so on. It allows for the purchase and sale of units on stock exchanges at any time of day.
Open-ended schemes – In an open-ended plan, units are continuously bought and sold, allowing investors to participate and quit at their leisure. The Net Asset Value is used to purchase and sell funds (NAV).
Closed-ended schemes – The unit capital in this form of scheme is fixed, and only a limited number of units can be sold. The investor cannot purchase units in a closed-ended scheme after the New Fund Offer (NFO) has expired, which implies they cannot exit the scheme before the end of the period.
The costs of investing in mutual funds
The fund value is determined by the Net Asset Value (NAV), which is the worth of the fund’s portfolio after deducting expenses. The AMC computes this at the end of each business day.
AMCs will charge you an administration fee to cover salaries, brokerage, advertising, and other administrative costs. Often, this is measured using an expense ratio. The lower the expense ratio, the less expensive it is to invest in that Mutual Fund.
Loads are basically sales charges incurred by the corporation in the form of distribution fees that AMCs may levy.
If you are unaware with related costs, you may find that the earnings from your investment are significantly decreased due to overhead expenses. As a result, it’s a smart practise to study the fine print for specifics on a Mutual Fund’s expenses and fees.
In-Depth Guide on Investing in Mutual Funds
Before you decide to invest in a mutual fund, bear the following points in mind. This will assist you in selecting the appropriate funds to invest in and accumulating wealth over time.
Choose your investment goal – This is the first stage in investing in a mutual fund. You must specify your investment objectives, which could include purchasing a home, funding a child’s education, planning a wedding, retiring, and so on. If you don’t have a precise goal, you should at least know how much wealth you want to accumulate and when you want to accumulate it. Defining an investment aim allows the investor to narrow down the investment possibilities depending on the level of risk, payment method, lock-in duration, and so on.
Comply with the Know Your Customer (KYC) regulations.
Investors must follow the KYC standards in order to invest in a mutual fund. The investor must submit copies of their Permanent Account Number (PAN) card, proof of residence, age proof, and other documents as stipulated by the fund institution.
Learn about the various schemes that are available –
There are numerous mutual fund options available. There are schemes that meet practically any investor’s needs. Before investing, make sure you’ve done your homework by researching the market and learning about the many sorts of schemes accessible. Following that, connect it with your investment objective, risk tolerance, and affordability to see what works best for you. If you are unsure about which programme to invest in, seek the advice of a financial professional. Finally, it is your money. You must guarantee that it is used to maximise returns.
Evaluate the risk factors -Keep in mind that investing in mutual funds has a number of hazards. High-return schemes are frequently associated with substantial risks. You can invest in equity programmes if you have a high risk tolerance and want to get high returns. Debt schemes, on the other hand, are suitable if you do not want to risk your investment and are OK with modest returns.
After you’ve determined your financial goals, met the KYC requirements, and researched the various schemes, you can begin investing in mutual funds. A bank account is also required when investing in mutual funds. Most mutual fund houses would want a physical or digital copy of a cancelled cheque leaf with the bank’s IFSC (Indian Financial System Code) and MICR (Magnetic Ink Character Recognition).
Mutual Fund Investing Options
Mutual fund investments can be made in a variety of ways. They are as follows:
Direct offline investment with the fund house
You can invest in mutual fund schemes by visiting the fund house’s nearest branch office. Just make sure you have a copy of the following documents with you – The fund house will send you an application form, which you must complete and submit along with the required documentation.
- Address Validation
- Identity Documentation
- Cancelled The Cheque Leaf
- Passport Dimensions photograph
Investing offline through a broker
A mutual fund broker or distributor is someone who will guide you through the full investment process. He will present you with all of the information you require to make your investment, such as the features of various plans, paperwork required, and so on. He will also advise you on which schemes to invest in. He will charge you a fee for this, which will be removed from the overall investment amount.
Online, via the official website
Most fund firms now provide the option of investing in mutual funds online. All you have to do is follow the instructions on the fund house’s official website, fill out the necessary information, and submit it. You can also complete the KYC process online (e-KYC) by entering your Aadhar number and PAN. The information will be validated at the backend, and once completed, you can begin investing. Most investors prefer the online procedure of investing in mutual funds since it is simple, quick, and hassle-free.
Using an app
Many fund firms allow investors to invest through an app that may be downloaded to their mobile device. Investors will be able to use the app to invest in mutual fund schemes, purchase or sell units, examine account statements, and check other facts about their portfolio. SBI Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund, Aditya Birla SunLife Mutual Funds, and HDFC Mutual Funds are among the fund institutions that accept investments via mobile app. Certain apps, such as myCAMS and Karvy, enable investors to invest and access the details of all their investments from numerous fund houses from a single platform.
Why should you consider investing in mutual funds?
As previously stated, mutual funds are professionally managed investment vehicles that compound your money over time. Mutual funds can invest in a number of instruments, such as stock, debt, and money market funds, and get a good return on your money. There are more reasons to invest in mutual funds, and we have highlighted the most important ones for you below:
Management at the highest level
Mutual funds are managed by expert fund managers that conduct market research and analysis, pick the proper stocks, then buy and sell them at the right time to achieve favourable returns on your investment. Before investing in a company’s stock, fund managers evaluate its performance. When you purchase units in a mutual fund scheme, the scheme information document (SID) will feature the fund manager’s professional overview, which includes the number of years of work experience, the type of funds managed, and the performance of the funds managed by him/her. As a result, you can rest certain that your money is in good hands.
Increased profits
Mutual funds provide better returns on your investments than term deposits such as Fixed Deposits (FDs), Recurrent Deposits (RDs), and so on by investing in a variety of assets. Equity mutual funds provide an excellent potential for investors to experience higher returns while also carrying high risks, making them perfect for investors with a high risk appetite. Debt funds, on the other hand, are less risky and provide higher returns than term deposits.
Diversification
Diversification is one of the most important advantages that mutual funds provide. Mutual funds lower portfolio risk by investing in a diverse range of asset types and stocks. As a result, even if one asset/stock performs poorly, the performance of other assets can compensate and you can still enjoy favourable returns on your investment. You can further reduce risk by diversifying your portfolio by investing in various types of mutual funds. If you are unsure about which funds to invest in or how to diversify or balance your portfolio, seek the advice of a financial professional.
Convenience
Many fund firms that offer online investing have made investing in mutual funds quick, easy, and convenient. You can begin investing in a mutual fund plan of your choice by simply clicking a few buttons. Even the KYC process is now available online, with investors able to contribute up to Rs.50,000 via the e-KYC facility. However, for investments exceeding Rs.50,000, investors must complete the physical
KYC process.
Low price
You can begin investing in mutual funds for as little as Rs.5,000 (lump sum) and Rs.500 (monthly SIP) (Systematic Investment Plan). As a result, you do not need to wait until you have a huge quantity to begin investing. Also, if you invest in a mutual fund scheme’s Direct Plan, you will not have to pay any additional commission to distributors or agents.
Investing with restraint
Mutual funds include a provision called as a Systematic Investment Plan to establish a habit of frequent investing (SIP). An SIP allows investors to invest small amounts on a regular basis, which might be weekly, monthly, or quarterly. You can set up an auto-debit facility for your SIP, which will debit a specified amount from your bank account every month. An SIP is a wonderful option to invest on a regular basis without having to invest each time. Now that you understand the advantages of investing in mutual funds and how to do so, start investing and watch your wealth rise.
