A few years ago, the Association of Mutual Funds in India (AMFI) launched the “mutual funds sahi hai” campaign as part of their investor awareness outreach program.
The “sahi hai” slogan practically followed you everywhere. You saw it on TV, you heard it on the radio, you saw a digital banner when you browsed the net and you even saw it in the movie theatres before the movie began.
This campaign primarily achieved two things:
This is great because, at Scripbox, we believe that investing in mutual funds is one of the best ways to achieve your financial goals.
If you are a beginner considering investing in mutual funds, you might have some pressing questions constantly nagging you.
Questions like, how does one even go about investing? Especially in the equity market.
What is the best way to invest in mutual funds?
How to open a mutual fund account?
How to invest in mutual funds without a broker?
How much to invest in mutual funds? And so on.Here is a comprehensive mutual fund investment guide to help you understand mutual funds better. It will also help you learn how to invest in mutual funds successfully.
The internet today is flooded with information about mutual funds. You will find answers to almost any question you have about mutual funds. Whether you want to know – how to invest in direct mutual funds or how to invest in mutual funds monthly, you have enough and more information available.
The sheer amount of information can make the prospect of researching and investing in mutual funds seem like a daunting task.
Having said this, we most certainly don’t want this to put you off from investing in mutual funds. Mutual funds are a very attractive investment option especially for beginners and are worth exploring.
In this article, we try our best to explain all the different aspects of investing in mutual funds. Our goal here is to encourage you to start investing in mutual funds by first educating you about them.
Let’s get started.
Essentially, a mutual fund is an investment vehicle that is formed by pooling money from various individual investors. The money thus accumulated is then invested in the capital market by purchasing shares, stocks, bonds and other assetsz. These different investments are collectively addressed as a portfolio.
A mutual fund is regulated by SEBI (Securities and Exchange Board of India) and typically offers higher growth than conventional investment options such as bank deposits and savings accounts.
Mutual funds are managed by asset management companies (AMCs). AMCs appoint a fund manager to run the fund.
A mutual fund is professionally managed by a fund manager who has a very deep understanding of how the capital markets work. Based on the objective of the mutual fund, the fund manager invests in different asset classes with the goal of generating the highest possible growth for each of the investors.
As a beginner, you may wonder about how to start investing in a mutual fund. You may not have the knowledge or the time to determine where to invest your money. This is where the knowledge and the experience of the fund manager comes in very handy.
You don’t have to worry about where and in which asset class your money is being invested in. It is the fund manager’s job to ensure that the investment portfolio remains well balanced and that your investment generates the average return expected by the fund you invested in.
As a mutual fund investor, you become a shareholder (of sorts)of the mutual fund. If the fund performs well, you will earn profits in the form of dividends and when the fund incurs losses, your shares (or units) decrease in value.
There are many benefits of investing in mutual funds. Let’s take a look at some of them in this section.
As a beginner, this is probably the biggest advantage of investing in mutual funds. You don’t have to worry about the timing of the market or constantly monitoring which companies or which sectors are performing well. All of this is done on your behalf. This takes a huge burden of decision making off your shoulders. The only decision you have to make is choosing which fund to invest in.
Mutual funds significantly reduce investor risk by buying stocks of different companies across multiple sectors. The fund manager constantly strives to achieve a truly diversified portfolio that strikes a good balance between risk and return.
For example, let’s say that the fund you invested in has purchased equity shares in both IT and telecommunications sectors. Let’s assume that the IT sector has a great quarter and the telecom sector underperforms; in this case, the growth generated by the IT sector will make up for the loss incurred in the telecom sector.
Since equity mutual funds invest in the equity market, they offer better growth than other traditional investment options like bank deposits and real estate. Equity Mutual funds performance is directly related to market performance. If the market performs exceedingly well, that will reflect in your mutual fund investments as well. Although there is a higher risk involved, you are handsomely rewarded in the form of better growth.
In addition to better growth, affordability is yet another important benefit of investing in mutual funds. With the help of mutual funds, you can participate in the equity market by investing as little as Rs. 500 to Rs. 1000 each month.
Mutual funds buy and sell in large volumes. This by default leads to lower transaction costs on a per-unit basis. For example, the transaction cost to buy one share of a stock is the same as buying 100 shares of the same stock.
It is easy to move money in and out of mutual funds. If your investment is in an open-ended fund, you can withdraw part or entire investment and redeem the value of your units. You can do this if an emergency arises or if you achieve your investment goal. This, of course, is not applicable to close-ended mutual funds where your money is locked-in for a set number of years.
Mutual fund investments are tax-friendly as well. You can save up to Rs. 1.5 lakhs under section 80C of the Income Tax Act by investing in Equity Linked Savings Scheme (ELSS). Indexation benefit available on debt funds is another way in which you can save money. In the case of debt funds, you are only taxed on the growth you withdraw.
We have talked about the various variables that affect your investments multiple times across Scripbox. It is important that you factor these in your decision-making process before you part with your hard-earned money. Here is a quick recap of what those variables are.
You are probably tired of hearing us talk about this already, but we had to mention the importance of knowing what your financial goals are before you start your investment. Most beginner investors fail to give this much thought and end up investing aimlessly. Knowing what you need the money for and in how many years will help you choose the right investment options.
This is another variable that is just as important as your financial goals. Your investment options should align with your current income along with keeping future needs in mind. For instance, if you are someone who just started earning with no other commitments, you can set aside a bigger chunk of your salary for your investments.
The age at which you start investing will play a huge role in helping you decide which type of mutual fund to invest in. If you are 25 years old, you would probably want to plan for something short-term like a car purchase or a vacation. If you start investing early you will reap the benefits.
There are various types of mutual funds available in the market today.
Each of these mutual funds can be further categorized into different kinds of schemes based on the financial objectives of the fund.
Let’s take a look at what some of them are.
Equity mutual funds predominantly invest in equity shares trading in the stock market. They are also known as stock mutual funds.
Due to the nature of these assets the equity funds invest in, they are an ideal investment option for investors who are willing to take a higher risk and are expecting inflation beating growth. Equity mutual funds are best suited for long-term investors and investors focused on wealth creation.
Debt mutual funds invest in debt and fixed-income securities such as debentures, corporate bonds, treasury bills, government securities, and other such debt-based securities. They typically have a fixed maturity date and also offer a fixed rate of interest.
Due to the nature of the assets included in debt funds, they are an ideal option for investors expecting a stable return on their investments. Debt mutual funds best suited for short-term financial needs.
As the name suggests, hybrid mutual funds invest in a combination of equity and debt securities. Hybrid mutual funds are the most logical choice for investors looking for a good balance between risk and return.
All these different types of mutual funds are further put into different categories based on the financial objectives they intend to achieve. Let’s take a look at what some of those categories are.
For instance, are divided into three main categories:
There are other funds under equity such as dividend yield funds, multi-cap funds and so on but these are the main categories you must be aware of.
They are divided into categories based on risk, duration, and liquidity.
There are other debt funds like Overnight Fund, a Money Market Fund and so on but we wanted to go over these three main examples to help you understand these categories better.
There are two primary categories that need to be discussed here.
The majority of mutual funds in the market are open ended funds. This allows investors to buy and sell units at any point as they do not have a set maturity date. It is up to the investor to stay invested or exit the fund.
With close ended funds there is a predetermined investment period in place. Investors can only invest during the initial launch period known as the New Fund Offer (NFO). once this period is done, no new investments are accepted.
A lot of the terms used in mutual funds can seem intimidating. All you have to do is spend some time to understand what they mean. If you are serious about your mutual fund investments, knowing what each of these terms means can be beneficial in the long-run.
Before we walk you through each step of investment in mutual funds, there are two important things we have to discuss.
One of the easiest ways to invest in mutual funds is through Systematic Investment Plan (SIP). A SIP is an investment method in which a predetermined amount is automatically deducted from your savings or salary account and invested in the mutual fund of your choice.
We have talked about SIP in great detail on our blog, you can find more information here.
The SIP way of Investing is a great place to start learning more.
In order to invest in mutual funds, you need to be KYC compliant, both with your bank and with the fund house (or investment platform) you choose to invest with. All you have to do is submit the details of your PAN card, a photograph, and address proof of your current residence. All of these have to be self-attested and can mostly be done in a paperless manner.
Let us assume by now you have decided to invest in a mutual fund, you might now want to know how to open a mutual fund account. Remember in the very beginning you had the question of whether you would need the help of a broker? We are pleased to say that you don’t.
Investing in mutual funds has become extremely easy these days. You can go directly to a fund house and set up your investment there or you could invest with Scripbox.
In fact, choosing which fund to invest in can be a difficult task; we at Scripbox have a scientific investment process that automates your entire investment in just a few clicks.
As always, we have walked you through each of those steps here.
Once you go to Scripbox’s website, click on the green ‘Let’s Get Started’ button.
You will be navigated further to see something like this on your screen. Click on the ‘Start an SIP’ option from this list.
Once you do that, you will be directed to this section shown below. Select ‘Monthly (SIP)’ and fill in the details of the amount and mention the number of years you want to stay invested. Then, click on ‘Create A Plan’.
You will be presented with options as follows.
Select the option that best suits your needs and click ‘Continue’.
If you select long-term wealth, you will see the following information on your screen. You will find additional information along with our basket of funds for 2020.
You just have to click ‘Continue’, sign up with your email address and follow the instructions on the screen.
Here are some suggested articles for you:
We have discussed the top performing mutual funds in India under different categories.
SEBI regulations require each fund to be classified amongst one of the following 36 different categories and here are SEBI categorisation of mutual fund schemes.
Don’t act impulsively every time you see a gain or a loss it’s better to know when to withdraw from your mutual fund.
When you have achieved your investment objective or there is a drastic change in the portfolio. You should go through for mutual fund redemption process only you would know how to redeem mutual funds online and offline.
Does it make a strong case for investing into real estate? Because Residential housing prices in the country have more than tripled in the past decade.
Tax Saving mutual funds not only save on your taxes but also offer handsome returns on the investment read this article called Best Tax Saving Mutual Funds To Cut Down Your Taxes and also understand how taxation is done in Mutual funds & know how the tax on mutual funds are carried.
We hope you found this article useful and that you know a little more about mutual funds by the time you reached this section. Take some time to read up and learn more about mutual funds whenever you get time. We have some great resources right here on the Scripbox blog. When you feel ready, you can start investing.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.