Mutual funds: The ultimate guide to beginners

mutual funds

Mutual funds make your savings grow. They are well assorted, less cost-effective, and keep your tax well organized. For the ones who do not or cannot invest directly in stocks, mutual funds are the best way to go. All you need to do is invest in a fund, and then the fund manager will be investing it in the stocks for you that will give you good returns. 

Despite being simple and convenient for small-scale investors, most of the Indian investors prefer to stay away from mutual funds because of the myths associated with it.

Myth 1: You need a Demat account to start investing in mutual funds.

Fact: False. All you need to do is complete a few mandatory KYC steps for your safety. 

Myth 2: You need to be an expert to invest in mutual funds

Fact: False. Even though having a good deal of knowledge is a plus, it is not mandatory. Proficient fund managers and experienced investors manage your invested amount.

If you are planning to invest in mutual funds for the first time, here is a well-suggested guide to help you start.


What are mutual funds and why one should invest in them?

In simple words, a mutual fund is a pool of money collected from multiple small/medium investors, intending to invest it in company shares, stocks and bonds together. This collected fund is given to a mutual fund company, where experienced investors manage it for us, and give us long term returns. the benefits of investing in mutual funds are:

i. Minimal risk-taking compared to investing in stocks directly with no prior knowledge.

ii. No technical knowledge required. 

iii. Mutual funds are safe as its activities is heavily regulated under the guidelines of SEBI.

1. To get ready 

To invest in mutual funds, all you need to do is complete your e-KYC on any bank or asset management company’s website. In case you don’t have your KYC, you can apply with a Registrar and Transfer agent (CAMS/KARVY) or just directly from a mutual fund house. For this process, you will require self-attested copies of a few things like your proof of address, identity, and a recently taken passport-sized photograph. People investing in small scales need not provide any of these proofs, however, having a permanent account number (PAN) and Aadhar card number is mandatory. 

The risks associated with mutual funds is much lesser than the share market as the professional and trusted managers make sure that you get maximum returns. Start by doing a background check of all the managers. You can then select the best one amongst the pool. After receiving returns from the stocks, the manager gets his commission, and the rest is divided equally amongst the investors. 

2. Choice of funds 

Ironically, the task of choosing the right mutual fund can be overwhelming to choose from 2500-3000 fund schemes. Below are some points that help you choose the right funds for you. 

i) Debt or equity

Debt mutual funds ensure steady returns, but they are lower than equity mutual funds. It has a low-risk factor, so it is suitable to meet short term goals, for example, if you have planned to buy a car next year then debt mutual funds are a better option.

Now coming to equity mutual funds, they are prone to fluctuations in the short term but will give higher returns in the long run. Balanced or aggressive hybrid funds have 65-80% of your money is invested in equity, and the rest in debt. In this, you can have the experience of equity funds and the stability of debt mutual funds. These two are best suited for your retirement plan.

ii) Which funds

After deciding the debt-equity allocation, you must select the specific fund under the debt-equity categories. Do not blindly believe your friends or family by randomly picking any mutual fund. Instead, do your research and see which one has performed well over the last few years and do not focus on the one that is famous during the time of your selection. 

iii) How Many

It is adequate to invest in two to three funds, as the diversity that you receive in investing in those two to three funds is more than enough for your portfolio. In just one single fund, your portfolio gets divided across 40-50 stocks.

iv) Direct plan or Regular plan

As you are a newbie in investments, mutual funds to be precise, it is advisable to go for a regular plan. A broker or an agent acts as a mediator between you and your selected fund manager. Therefore, it may cost a little extra money. However, a regular plan will help you gather more knowledge about mutual funds. Consequently, when you are confident and knowledgeable about mutual funds, you can go for a direct plan. 


V) Growth or Dividend option

If you think you don’t require returns in the form of dividends, it is better to opt for the growth option as then you can make the most of your funds returns due to compounding. 

3. Buy funds 

After you select the fund, the next step is to buy. There are two ways to purchase funds. Either from the buying funds or through an intermediary. If one wants to invest directly, they need to submit some filled forms, cheques, etc. at mutual fund houses or to the registrars. One can also invest online, through websites of the mutual fund houses.  

If you wish to invest through an intermediary, then you can do so through banks, financial advisors, online portals. You can also go through distribution companies and brokerages. At this point, you will need to know how much to invest and the frequency of it.

You can do so through two options. First, lump-sum investment and the second being Systematic Investment Plans (SIP). In lump sum money investments, you need to invest all your money together. Whereas, for SIP, invest a fixed amount of money at a time.  

4. Investments need to be monitored 

It is vital to keep a record of all your investments and how they perform. You might keep getting updates every day. However, you need not over-analyse all your investments.  

5. When to sell and how  

Consider selling your funds when it does not perform well in the market. When you see that the rating of the funds is dropping, you should sell the funds and look for other options. 

The second reason when you must consider selling your funds is when you think you need to meet all your financial targets. Equity funds are to be withdrawn in a very systematic manner. Hence, when your target comes closer, you need to withdraw your equity funds and store them in debt funds. It will help you avoid any declines in the funds. Also, keep a note of the tax indications. 

The bottom line

Most investors believe that mutual funds can make them rich overnight. However, that’s not the case. Mutual funds are subject to market risks. It’s crucial to read all scheme related documents carefully. If you invest in high-risk funds, you might get higher returns or even face higher losses and vice versa. If you don’t have a high risk-taking appetite, consider investing in medium or low-risk shares. 

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