How to Invest in Mutual Funds – For most investors, mutual funds are a great way to build a diversified portfolio without any additional cost or hassle. There are usually hundreds, if not thousands, of different stocks, bonds, and other securities, giving you instant diversification.
To invest in mutual funds you need to know how to invest in mutual funds. In this article, we have explained various ways to start investing in mutual funds online in India. Mutual funds are one of the best investment options as it offers a wide range of options that have the potential to meet the need of every investor, irrespective of their financial investment objectives or risk appetite.
This article helps you understand the different types of mutual funds available in India and the different ways in which you can invest. Here, you can know why you should choose mutual funds for your investment and how to invest in mutual funds.
Things To Consider Before Investing in Mutual Funds
Before you decide to invest in mutual funds, it is important to keep the following points in mind. Doing so will help you choose the right type of funds to invest in and help you accumulate wealth over time.
- Identify your investment objective: This is the first step towards investing in mutual funds. You need to define your investment goals which can be – buying a house, child’s education, marriage, retirement, etc. If you don’t have a specific goal, you should at least be clear about how much assets you want to accumulate and the amount of time it takes. Identifying an investment objective helps the investor to consider investment options based on the level of risk, payment method, lock-in period etc.
- Meet Know Your Customer (KYC) requirements: Investors need to follow KYC guidelines to invest in mutual funds. For this, the investor has to submit copies of Permanent Account Number (PAN) card, proof of residence, age proof etc. as specified by the fund house.
- Know about the available schemes: The mutual fund market is full of options. There are schemes to suit almost every need of the investor. Before investing, make sure you do your homework by researching the market to understand the different types of schemes available. Having done that, align it with your investment objective, your risk appetite, your affordability and see what suits you best. If you are not sure which scheme to invest in, take the help of a financial advisor. In the end, it’s your money. You need to make sure that it is used to get maximum returns.
- Consider the risk factors: Remember that investing in mutual funds comes with a set of risks. Schemes giving high returns are often accompanied by high risk. If you have a high risk appetite and want to earn high returns, you can invest in equity schemes. On the other hand, if you do not want to risk your investments and are okay with moderate returns, you can go for debt schemes.
After identifying your investment objectives, fulfilling KYC requirements and locating various schemes, you can start investing in mutual funds. A bank account is also a must while making mutual fund investments. Most mutual fund houses will ask for a physical or online copy of the bank’s IFSC (Indian Financial System Code) and MICR (Magnetic Ink Character Recognition) canceled check leaf.
Types of Mutual Funds
The types of mutual funds are broadly classified on the basis of investment objective, structure and nature of the schemes. When classified according to investment objective, mutual funds can be of 7 types – Equity or Growth Fund, Fixed Income Fund or Debt Fund, Tax Saving Fund, Money Market or Liquid Fund, Balanced Fund, Gilt Fund and Exchange Traded Funds (ETFs).
Based on the structure, mutual funds can be of 2 types – closed-ended and open-ended schemes. When mutual funds are classified on the basis of nature, they can be of 3 types – Equity, Debt and Balanced. There is an overlap in the classification of certain schemes like Equity Growth Fund which can fall under the classification based on the nature of investment objective as well.
We have listed some of the types of mutual funds below:
- Growth or Equity Schemes: These funds invest in equity shares and the investment objective is capital gains in the medium or long term. They are associated with high risk as they are associated with highly volatile stock markets but in the long term, they offer good returns. Hence, investors with a high appetite for risk consider these schemes as an ideal investment option. Growth funds can be further classified into diversified, sector and index funds.
- Debt Funds : Also known as fixed income funds, they invest in fixed income or debt securities such as debentures, corporate bonds, commercial papers, government securities and various money market instruments. For those who want regular, stable and risk free income, debt funds can be an ideal option. Gilt funds, liquid funds, short term plans, income funds and MIPs are the subcategories of debt funds.
- Balanced Funds: These funds invest in a mix of debt instruments and equity shares. Investors can expect regular income and growth at the same time with these funds. They provide a good investment option for investors who are ready to take moderate risk for the medium or long term.
- Tax Saving Funds: Anyone looking to save tax as well as increase their corpus can opt for tax saving schemes. Investors can enjoy tax exemption under Section 80C of the Income Tax Act, 1961 through Tax Saving Funds, also known as Equity Linked Savings Schemes.
- Exchange-traded fund (ETF): An ETF trades on a stock exchange and owns a basket of assets such as bonds, gold bars, oil futures, foreign currencies, etc. It provides the flexibility to buy and sell units throughout the day on the stock exchanges.
- Open-ended Schemes: In an open-ended scheme, units are bought and sold continuously and hence, allows investors to enter and exit as per their convenience. Funds are bought and sold at Net Asset Value (NAV).
- Close-ended schemes: In this type of scheme, the unit capital is fixed and only a specific number of units can be sold. Units in a closed-ended scheme cannot be bought by the investor after the New Fund Offer (NFO) is passed, which means they cannot exit the scheme before the end of the term.
29 Types of Mutual Funds: Based on Structure, Asset Class, Risk and Characteristics
How to Invest in Mutual Funds?
1. How to Buy Mutual Funds from AMC (Direct Plan)?
Investment in mutual funds can be done online and offline directly by visiting the website of AMC. The process includes the following steps;
- open a new account account
- Provide personal details for investment
- Fill out the FATCA Form
- provide bank details
- Upload image of canceled check
- Verify KYC and transfer money through Aadhaar
Offline investment can be done by visiting the AMC local office and submitting an application, KYC documents and making payment.
2. How to Buy Mutual Funds from the Investment Platform (Regular Plan)
You can invest in mutual funds in a hassle-free manner using the online investment platform. The platform is a single account access that helps you to invest, track and manage all your mutual fund investments with different AMCs.
The steps required to invest using an online investment platform are;
- Create an account with the investment platform
- Select scheme or plan
- Select the payment type (SIP or lump sum) and amount
- Fill some personal details like PAN and bank details
- Transfer money online to complete the investment
3. How to Invest in Mutual Funds through Demat Account
If you already have a demat account then you do not need to put extra effort to invest in mutual funds. Your existing demat account and bank account can be used for investing and transacting in mutual funds.
To invest in mutual funds through a demat account, you need to log in to your demat account and look for the option to invest in mutual funds. In the next step, you have to choose the fund in which you want to invest. Then you have to complete the investment by transferring the amount online.
4. How to Buy Mutual Funds through an Agent
This method is not recommended as it is an expensive and time-consuming method of investing in mutual funds. For information only, how investments can be made through an agent;
- Calling Your Agent Who Must Be a Mutual Fund Distributor
- Hand over the filled application form along with a copy of all KYC documents and canceled cheque.
Different Ways of Investing in Mutual Funds
Mutual Fund Me Invest Karne Ke Tarike
Once you understand your risk preference and finalize the schemes where you want to invest your money, it is important to understand the different modes of investing in mutual funds. In their endeavor to make investing simple and convenient, fund houses offer various investment avenues such as:
- Single investment or lump sum investment
- Systematic Investment Plan या SIP
- Systematic Transfer Plan or STP
- Dividend Transfer Plan or DTP
- Systematic Withdrawal Plan or SWP
These schemes are designed to help you find the best investment avenue for your income and investment goals. Let’s look at each of them in detail:
1. Lumpsum Investment or Lumpsum Investment
Let’s say you have managed to build a corpus and are now looking for ways to invest and earn returns. Or you are a working professional and you have been given a nice bonus this year and want to invest it instead of spending it on an extravagant vacation or an expensive gadget.
You start looking at investment options and see that mutual funds offer a wide variety of schemes to choose from. So you analyze your risk preference, define your investment objective and start assessing individual schemes.
Once you have finalized the kind of schemes you want to invest in, you are faced with the question of whether you want to invest the entire amount all at once or not.
Lump sum investing has its advantages and disadvantages. While this creates the potential for higher returns if timing your purchases is right, it can also put your investment at higher risk (if your timing is wrong).
To hedge against this, it is important for lumpsum investors to have a long time horizon of investment and invest in schemes that have a stable track record.
2. Systematic Investment Plan or SIP
This option is perfect for people with regular monthly income – majority of the population of our country – are working class. If you do not have any savings but want to start building wealth for your future expenses, then SIP is a boon for you. If you choose the SIP mode of investing in mutual funds, you can start saving with as little as ₹500 per month.
It works similar to a recurring deposit where you deposit a fixed amount every month which gets added to your cumulative capital and earns compound interest. In the SIP mode of investment, units are purchased based on the NAV (Net Asset Value) of the scheme on the day of installment payment.
This helps you to benefit from rupee cost averaging as your funds are invested in the same scheme at different levels of the market. So when markets are high, the number of units purchased is less than when markets are low.
3. Systematic Transfer Plan or STP
If you have a corpus of funds, but you do not want to invest in lump sum and not in the form of SIP, then a Systematic Transfer Plan (STP) is made just for you!
An STP can help you invest gradually in equities by initially investing your funds in low-risk options and systematically transferring funds from the same fund house to a higher return scheme (like equity).
They utilize the benefits of investing a lump sum without any added risk of SIP by exposing your corpus to low-risk funds and transferring a smaller amount to higher-return schemes. It is the best of both worlds and if used wisely, can help you meet your financial objectives.
4. Dividend Transfer Plan or DTP
Most investors are aware of the Dividend Reinvestment Plan (DRIP), where they no longer receive the dividend payment, but the amount is reinvested in the scheme that generated the dividend. Dividend Transfer Plan (DTP) works similar to DRIP but with a small change in the structure.
In a DTP, dividends can be reinvested in a scheme from a different asset class than the one that generates the dividend. So, if you have received dividend income from a debt scheme, you can ‘transfer’ it to an equity scheme and vice versa.
This works well for low-risk investors who have invested in debt funds. They can choose to transfer their dividend to an equity fund and create the possibility of earning higher returns without putting their capital at any risk.
5. Systematic Withdrawal Plan or SWP
As the name suggests, this is more of a withdrawal method than an investment mode, but we thought it was worth a mention because investing is all about managing your future needs and expenses.
Let’s say – you work to save money for the rest of your life and invest it carefully to build a fund. At the time of retirement, you get paid as per the scheme and have a good corpus in your bank account. But, you are not so good at managing expenses and spending on unnecessary things. So this exposes the possibility of your entire corpus getting exhausted soon and the possibility of being left without any savings/investments in old age. This is definitely not a pleasant thought.
“Spending wisely is a part of investing wisely and it is never too late to start.”
A Systematic Withdrawal Plan (SWP) steps in here and ensures that you lead a financially healthy life post-retirement and will never be short of money. Through this scheme, you decide in advance the amount you want to withdraw monthly / quarterly to meet your regular expenses. The remaining investment continues to earn returns till the longevity of your fund.
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Costs Involved To Invest in Mutual Funds
Fund value is calculated as per Net Asset Value (NAV), which is the total expenses of the fund’s portfolio. It is calculated by the AMC after every business day.
AMC will charge you an administrative fee, which includes their salary, brokerage, advertising and other administrative expenses. It is usually measured using the expense ratio. The lower the expense ratio, the lower will be the cost of investing in that mutual fund.
AMCs may also charge loads, which are basically sales charges incurred by the company in the form of distribution costs.
If you are unfamiliar with associated charges, you may come across a situation where the returns from your investments are significantly reduced due to overhead expenses. Therefore, it is a good habit to read the fine print for details of expenses and fees related to mutual funds.
Why should you invest in Mutual Funds?
As stated above, mutual funds are professionally managed investment vehicles that will add to your money over a long period of time. Mutual Funds can invest in a variety of instruments like Equity, Debt, Money Market etc. and can get favorable returns on your investment. There are many more reasons why you should invest in mutual funds and we have picked the top ones for you below:
- Professional Management: Mutual funds are managed by professional fund managers who do research and track the markets, identify the right stocks, and buy and sell them at the right time to get a favorable return on your investment. Fund managers also analyze the performance of firms before deciding to invest in their stocks. Also, when you buy units of a mutual fund scheme, the Scheme Information Document (SID) will contain the professional summary of the fund manager which includes years of work experience, type of fund managed and the fund’s performance. managed by him. So, you can rest assured that your money is in the right hands.
- Higher Returns: As compared to fixed deposits like Fixed Deposits (FD), Recurring Deposits (RD), etc., Mutual Funds offer better returns on your investment by investing in a variety of instruments. Equity mutual funds provide an excellent opportunity for investors to enjoy high returns but at the same time carry high risks and hence, are ideal for high risk investors. Debt funds, on the other hand, offer less risk and yield better returns than fixed deposits.
- Diversification: Perhaps one of the biggest advantages of mutual funds is diversification. By investing in a wide range of asset classes and stocks, mutual funds reduce risk by diversifying the portfolio. So, even if one asset/stock is not performing well, the performance of other assets can balance it out and you can still enjoy a favorable return on your investment. To further reduce the risk, you can diversify your portfolio by investing in different types of mutual funds. If you are not sure about which funds to invest in and how to diversify or balance your portfolio, seek the help of a financial advisor.
- Convenience: Investing in mutual funds has been made quick, hassle free and simple by several fund houses providing online investment facility. With just a click of a few buttons, you can start investing in the mutual fund scheme of your choice. Even the KYC process can now be done online and investors can invest up to Rs 50,000 using the e-KYC facility. However, for investments above Rs 50,000, investors are required to complete the physical KYC process.
- Low Cost: You can start investing in mutual funds for as low as Rs 5,000 (Lump sum) and Rs 500 monthly SIP (Systematic Investment Plan). So, you don’t have to wait for depositing a large amount to start investing. Also, if you invest in a direct plan of a mutual fund scheme, you do not have to pay any additional commission to the distributors or agents.
- Disciplined Investments: To inculcate the habit of regular investing, mutual funds offer a facility known as Systematic Investment Plan (SIP). A SIP allows investors to invest small amounts regularly, the frequency of which can be weekly, monthly or quarterly. An auto-debit facility can be set up for your SIP where a certain amount will be automatically debited from your bank account every month. A SIP provides a great way to invest regularly and without having to invest manually every time.
Now that you know about the benefits of investing in mutual funds and how to invest in them, start investing and watch your wealth grow.
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Frequently Asked Questions on Investing in Mutual Funds
What is the regulatory body for mutual funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All mutual funds should be registered with SEBI. The only exception is UTI, as it is a corporation formed under a separate Act of Parliament.
What are the risks involved in investing in mutual funds?
One very important risk involved in mutual fund investing is market risk. When the market is bearish, most equity funds will also experience bearishness. However, due to professional fund management, the specific risks of the company are largely eliminated.
On what parameters should a mutual fund scheme be evaluated?
Performance indicators such as the total return given by the fund over various schemes, the return on the competing fund, the fund’s objective and the promoter’s image are some of the major factors that should be considered while making an investment decision with respect to mutual funds.
What are the different types of schemes offered by any mutual fund scheme?
It depends on the strategy of the respective scheme. But generally there are 3 broad categories. Dividend scheme involves regular payment of dividend to the investors. Reinvestment scheme is a scheme where these dividends are reinvested in the scheme itself. A growth scheme is one where no dividend is declared and the investor benefits only through capital addition to the fund’s NAV.
How can one track the performance of a mutual fund scheme?
The performance of a scheme is reflected in its Net Asset Value (NAV) which is disclosed on a daily basis in case of open-ended schemes and on a weekly basis in case of closed-ended schemes. The NAV of the mutual fund is required to be published in the newspapers. NAVs are also available on the websites of mutual funds. All mutual funds need to post their NAV on Association of Mutual Funds in India (AMFI) website www.amfiindia.com and thus investors can view the NAV of all mutual funds at one place.