How to Invest in Mutual Funds?
Financial independence is the dream of many. And, while there are many investment vehicles available to ensure the same, mutual funds often take the front seat. But before starting anything, it's necessary to be aware of everything that comes within the territory, and the same goes with mutual funds. So let's begin and take a look into what mutual funds are, how to invest in mutual funds, and how they help you ultimately achieve that ultimate goal of achieving financial independence.
What are Mutual funds?
A mutual fund is an investment vehicle that creates a pool of money secured from several individual investors sharing common investment objectives. Mutual funds are operated by asset management companies and managed by fund managers who handle the pooled money and buy securities like stocks, bonds, and combined debt as an investment to generate capital for the investors in line with the investment objectives stated in the fund's prospectus. Various types of mutual funds are available in the market that investors can select based on their risk appetite, financial goals, and time horizon.
How do mutual funds work?
Mutual means splitting the profits (and sometimes the losses) with the other investors in the fund. When multiple investors invest different amounts in a mutual fund through an asset management company (AMC), the AMC pools all the money together and creates a sizable amount to invest in a diversified portfolio of stocks, bonds. The fund manager then outlines the mutual fund’s goals, manages its investments, and generates capital gains from the assets. Fund managers can then distribute the profits to the investors or reinvest them depending on the former's strategy and current market conditions.
Why should one consider investing in mutual funds?
Every investor has a personal risk appetite, goals, and time horizons. Mutual funds here bring these aspects together and prove the best option for any investor. Here are some of the reasons why you should include mutual funds in your portfolio.
- Mutual funds are managed by highly qualified and experienced fund managers who are well versed with market insights and landscapes and make better decisions as per the market dynamics to fetch maximum return on investments for you.
- They are an investor-friendly medium for investment. You can invest in mutual funds with as little money as Rs. 500/month through a Systematic Investment Plan (SIP).
- They help you create a balanced and diversified portfolio. Wherein a portion of your investments is allocated to equities and other assets, so when one stock incur losses others make up for them, and thus the overall risk reduces while you get the
- Mutual funds are known to fetch higher returns over time. Whether it’s for the short term or the long term, there are high prospects of generating better returns.
- They are highly liquid (you can exit and redeem the funds whenever you want) and come with attractive tax benefits.
Few considerations for investing in mutual funds for beginners
If you are planning to invest in mutual funds and are unaware of how to invest in mutual funds in India, it's essential to be aware of the know-how of mutual fund investment. Doing so will help you select the right kind of fund and generate wealth over time. Below are a few points you must consider before investing.
- Be sure of your goals: This is probably one of the first aspects that help you resolve the crux of identifying the risk, payment method, lock-in period, etc., and ultimately selecting any mutual fund.
- Get KYC done: To invest in mutual funds, investors must comply with KYC guidelines. You would need information like address, mobile number, and bank details to update KYC and then submit it to the fund house.
- Research about available schemes: The investment market has innumerable mutual fund schemes for every investor's needs. Before you invest, make sure you research the available fund schemes. Check if they align with your investment objective, risk appetite, or affordability to select the best.
- As a novice investor, it's better to consult a financial advisor who can access better options for you and help you zero in on the scheme that fetches you maximum returns.
- Consider the risk associated: Mutual funds inherently come with a set of risks. Schemes that promise higher returns usually have higher risks associated. If you have a higher risk appetite, you can invest in equity-based schemes. Else, for moderate returns, debt schemes can be the best option with relatively fewer risks.
How to invest in mutual funds as a beginner in India?
Following are the different ways that investors can utilize to invest in mutual funds
Offline mode (Invest through a fund house)
- For this, you can visit the nearest fund office. Here, you would be required to fill in an application form and submit some documents as asked by the fund house.
Offline mode (Invest through a broker)
- A mutual fund broker may also help you through the entire process of investment. For this, the broker will charge a fee, which you may have to pay from your investment amount.
Invest in mutual funds online through the official website or app
- Nowadays, many fund houses have an online facility for investing in mutual funds. It is one of the best ways to invest in mutual funds, as you only have to follow the instructions provided on the official site or app of the fund house and submit some relevant information. Once the fund house verifies your application, you are ready for investment. You can also complete the KYC process online, for which you would need an Aadhar number and PAN.
Starting a mutual fund investment is probably one of the quickest and hassle-free ways for wealth generation as it not only helps you create a diversified portfolio but also lessens the considerable burden of selecting stocks individually. And, with such investor-friendly benefits, it's truly one of the best ways an investor can employ to ensure you have enough wealth for a comfortable life ahead.
Who can invest in mutual funds?
- The good thing about mutual funds is anyone can invest in them with as low as Rs 500 and achieve both long and short-term investment objectives.
What is the redemption price?
- Price at which open-ended schemes repurchase their units and the close-ended fund schemes redeem their units upon maturity based on the NAV.
What is a scheme information document (SID)?
- The Scheme Information Document is one of the fund offer documents prepared by the AMC that entails details of the scheme to be presented to the investors.
What is an ELSS mutual fund?
- ELSS (Equity Linked Savings Schemes) are Mutual fund investment schemes designed to save income tax. They are also known as tax-saving funds. In the Income Tax Act under section 80c, taxpayers can invest up to Rs. 1.5 lakh in any securities and claim a deduction from their taxable income.
How can I gauge the performance of a mutual fund scheme?
- You can analyze the performance of any scheme by its NAV disclosed daily. You can visit www.amfiindia.com to access the NAVs of any mutual fund.
How can I calculate NAV?
- You can calculate NAV by dividing the total net value of all assets in the fund's portfolio by the total number of units issued to investors. NAV is a crucial aspect that helps investors identify potential investment opportunities within mutual funds, ETFs, and indexes.