Investing in Mutual Funds for Beginners – Beginner’s Guide to Mutual Funds
Equity markets have a long-term track record of giving inflation-beating high returns. In the long run, equities have created wealth for investors through the power of compounding. So, if you are new to the world of investing in equities, then mutual funds are a good financial product to start your investment journey. This article focuses on investing in mutual funds for beginners.
Mutual funds are a collective investment vehicle that pools money from many investors with a similar objective and invests it on their behalf. A mutual fund house offers various mutual fund schemes to investors to choose from. Every scheme has a different objective. A qualified and experienced fund manager invests the money.
How does a mutual fund work?
A mutual fund scheme allows investors to invest in two ways. Investors can invest during the New Fund Offering (NFO) period when a scheme is newly launched. Investors can also invest any time after the NFO closes. Investors are allotted the scheme units in proportion to their investment. The net asset value (NAV) of the scheme moves in tandem with the value of the scheme's underlying assets (securities). An investor's profit or loss depends on the difference between the current unit NAV and the purchase price of the units.
Why should you invest in mutual funds?
There are various benefits of investing in mutual funds. Some of these include:
- Most mutual fund schemes have a diversified investment portfolio. For example, most equity mutual fund schemes have a portfolio of 25 – 50 stocks from various sectors. Diversification reduces the risk for an investor. If some stocks in the scheme portfolio don’t perform as expected, the outperformance of the other stocks makes up for it, and the portfolio still generates good returns for investors.
- A qualified and experienced fund manager runs the mutual fund scheme. They have a research team that thoroughly studies every company before investing in its shares. Along with the investment process, the other aspects of the mutual fund house, such as accounts team, legal and compliance team, etc., are all professionally managed.
Low minimum investment amount
- You can start investing in a mutual fund scheme from a very low amount. During the NFO, most AMCs have a minimum lumpsum investment of Rs. 5,000. They also offer the systematic investment plan (SIP) mode of investment. Most AMCs offer SIP from as low as Rs. 100, which is affordable to most people across all income groups.
Low-cost investment product
- As discussed in the earlier section, mutual funds have professional management across departments. A mutual fund scheme charges a small fee known as expense ratio to the investors for all these services. The expense ratio ranges from 0.05 to 2.5%, depending on the mutual fund scheme.
Income tax benefits
- The Equity Linked Savings Schemes (ELSS) offers income tax benefits at the time of investment under Section 80C of the Income Tax Act. The ELSS scheme allows a deduction from taxable income. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is lower.
Convenient and easy to start investing
- Investment in mutual funds is convenient and easy. You need to do your Know Your Customer (KYC) verification only once. Post KYC compliance, you can invest in any scheme of any mutual fund house. These days, most fund houses allow you to invest online from the comfort of your home. You can start, stop, and redeem your investment online.
Things to consider as a first-time investor
Before you start investing in mutual funds, as a first-time investor, you need to consider the following things:
Do your risk assessment - Before you decide to invest in any financial product, you need to assess your risk. You can do your risk assessment with the help of a financial advisor or an online risk assessment tool. Based on the amount of risk you can handle, you will be classified as an aggressive or conservative investor. Your risk profile will help you understand which mutual fund schemes you should invest in.
Make a plan for your financial goals - With the help of a financial advisor, you can identify your financial goals, quantify them, and make a goal plan on how to achieve them. A goal plan considers the amount to be accumulated, the investment time horizon, the expected rate of return and accordingly tells us the amount to be invested to achieve the financial goal.
- Asset allocation - An asset allocation strategy requires you to spread your investment portfolio across various asset classes such as equity, debt, gold, real estate, etc. No one knows which asset class will do well next year and the following years. Hence, it is best to spread your investments across various asset classes so that irrespective of whichever asset class does well, your investment portfolio benefits from it.
How to invest in mutual funds?
You can invest in mutual funds through the Glide Invest platform. You just need to select the financial goal, the amount you need to accumulate, your risk profile, etc. The platform will recommend the mutual fund schemes you need to invest in.