How to Invest in Mutual Funds – For Beginners in India – Guide 2018

Mutual Fund Campaign by AMFI has generated a lot of curiosity in the mind of investors & they are asking – How to Invest in Mutual Funds? This is a detailed post & step by step guide so you can invest in Mutual Funds. It’s divided into 3 parts

  1. Investing in Mutual Funds – Basics
  2. 21 Benefits of Mutual Funds
  3. Investing in Mutual Funds for Beginners
    • 5 step approach
    • Checklist to invest in Mutual Funds
    • Top ways to derive Maximum Benefits

How to Invest in Mutual Funds – Basics

If you are looking to invest your money and are looking at mutual funds as an option, then you would also be looking forward to more information on what are mutual funds? Information related to the basics of mutual funds so as to be able to start investing your own money yourself or with the assistance of a financial planner or an investment advisor. You want this information to be simple and straightforward. If you are looking for this kind of information at one place, then this blog is for you.

Mutual Fund Basics

A mutual fund is a collection of money from investors to buy stocks or bonds 

A mutual fund is a pool of money. When many individuals (investors) come together for a common cause or objective and pool their money, it is called a mutual fund. Each mutual fund should have an investment objective. An Asset management company or AMC is appointed to manage these resources. The AMC then selects “fund managers”. The Trustees of the mutual fund monitor the fund’s activities. The AMC takes your money in a particular scheme with a particular objective for example – capital appreciation and then your money is invested in specific stocks and/or bonds as per this objective.

Mutual funds issue units to its investors as per the amount of money invested 

When you invest in a mutual fund, the value of each unit is called NAV (Net Asset Value), which is reflective of the current market value of one unit of the fund’s holdings.  If the NAV of the scheme’s unit is Rs. 20 and you invested Rs. 1,00,000/-, then you would be allocated 5000 units on the day of purchase. This NAV varies on day to day basis. As the NAV rises or falls, you either make a profit or loss. The NAV is also equal to the market value of securities of a scheme less the total recurring expenses, divided by the total number of units.

Mutual Fund Basics

Mutual funds diversify risk 

Given that there are ups and downs in the market, any stock and/or bond could face a downturn. In order to control loss due to exposure to that particular stock, mutual funds reduce risk of losses, as mutual funds invest in many stocks or industry verticals or in several industries like FMCG, Power, Telecom, IT, Pharma, Steel, Housing. This ensures that if one industry or few stocks are not performing, the other well-performing industries ensure your entire capital is not at risk.

Mutual funds provide professional fund management 

When you purchase a mutual fund, you have invested in a scheme which has in turn invested in stocks and/or bonds. Mutual funds are a basket of investments made basis the investment objective. They are thus beneficial as they allow you to make diversified investments and are professionally managed by financial professionals and investment experts called as fund managers. The fund managers continuously scan various investment opportunities available in equity and debt markets. Instead of buying stocks directly, you invest in mutual funds wherein fund managers managing the scheme, would on your behalf buy shares and bonds as the case may be.

Transparency and availability of data

To find a suitable mutual fund for your investments, you may like to understand the details or may like to analyse the funds. You can choose tools or take the help of a financial planner to identify suitable funds for your goals. You can read the fund prospectus to know details such as past fund performance, fund manager history, fees, charges. Data is available on the AMFI website and also on the AMC (asset management company website).

There is no guarantee of performance of any fund or scheme, but data availability allows you to track various kinds of mutual funds which helps to reduce risk.

Today Indian investors have a choice of mutual funds to choose from ranging from equity, debt or hybrid funds.

Types of Mutual Funds

There are many different types of funds, some of these are

  1. Equity, Debt, Hybrid funds: Equity mutual funds invest 100% of your money in stocks in the equity market. Similarly Debt funds would invest in the debt/fixed income market whereas hybrid would invest in a mix od equity and debt markets.
  2. Open Ended, Close ended: The former is the one wherein you can enter and exit anytime while the latter does not allow exits before specified time period and has a lock-in.
  3. ELSS: Known popularly as Equity Linked Savings Schemes are meant for taking benefits under Section 80 C of the Indian Income Tax Act and have a lock-in period of minimum three years.
  4. Sectoral Funds: These Funds invest in specific sectors like banking, Infrastructure

Read – Arbitrage Funds – Should You Invest

how to invest in mutual fund

You have worked hard and now want to invest your money? You have invested in a savings account, fixed deposits, PPF but have yet not tried mutual funds. At the same time you are seeking investments which will help fulfill your goals while beating inflation. You may also need a professional to advise, select, manage and monitor or may do so yourself.

If you want your money to grow in a meaningful way and to beat the ups and downs of the market, then plan to invest in mutual funds. They are safe and are well regulated and therefore less prone to chances of fraud.

So, no matter what your risk appetite is, choose the right kind of mutual fund. For your short term goals invest in debt or liquid funds. For your long-term goals, you may select equity mutual funds or balanced funds. Of course, in equity mutual funds you also get long term tax benefits, if held for greater than one year making it nearly tax-free returns.

Hence, this blog aims to makes it easy for you as a beginner to understand mutual funds.

Our next blog in the series demystifies certain doubts about mutual funds and brings out the detailed benefits about investing in mutual funds.

21 Benefits of Mutual Funds

If you have read our earlier part titled: “How to invest in mutual funds”, you would have got a clear idea about basics of Mutual Funds. This part shall attempt to help you to understand advantages of mutual funds.

How do you make money? The first one is through appreciation of your fund value. The value of the fund goes up or down as the value of the particular stocks go up or down. The second one is through dividends, which come through payouts to unitholders.

You have a variety of funds like equity, debt, index, balanced or with objectives also.

How can you benefit from mutual funds:?

  1. Moving from Fixed deposits and unit-linked policies, you may be looking for beating the inflation or fulfilling your life goals, then mutual funds are the answer.
  2. Mutual funds offer the convenience of easy liquidity like getting back in a day.
  3. They provide the right kind of diversification as mutual funds invest not in one but many asset classes such as stocks, bonds. Best investment for NRI
  4. Are mutual funds for the wealthy only? No. Mutual funds investments are for everyone as you can start investing in small amounts. So, you can choose from a wide variety of funds. There are plans for everyone.
  5. For different kind of goals like your child’s’ education or marriage you could choose diversified equity funds and for liquidity purpose, you could choose short term funds or liquid funds.
  6. Charges for these professionally managed funds. Yes. There are  fund management fees, but these get give you access to professional research and investment management.
  7. You get income tax benefits under Sec 80C for ELSS mutual funds in two ways. One, is a tax deduction while making ELSS investments and help you to optimise your taxation. ELSS is the shortest lockin tax saving option as it can be redeemed after three years and it is also easiest to redeem while making investments from income tax perspective, unlike PPF, FD.
  8. The benefit of investing in mutual funds comes from the fact that a combination of equity and debt brings the growth of equity and stability of debt. Thus making mutual funds more beneficial.
  9. Mutual Funds bring you the benefit of compounding interest. Interest on interest. Albert Einstein said: “Compounding interest is the eighth wonder of the world”. One who earns it gets it.
  10. The units are easily redeemable from the AMC. Thus mutual funds bring easy exit and no hassles of much paperwork or physical presence.
  11. Mutual funds are bringing in the benefit of investing in a lump sum mode or variable mode like weekly, monthly, quarterly. You can set up a monthly systematical investment plan called as SIP.
  12. Mutual funds are for everyone. They are suitable for all classes of people like salaried, professionals, businessman or entrepreneurs.
  13. Affordability: With just Rs. 500/- per month, you can start investing.
  14. Once you have invested, then you should be able to track your investment performance. How do you do it? Well, to know this, every mutual fund has a benchmark, and it could be part of the NIFTY or SENSEX.
  15. Convenience: Now there are online “do-it-yourself” options to start investing within 5 minutes. However, do not jump start to such conclusions! Your best options would be through a SEBI Registered Investment Advisor who can also do your mutual fund implementation and execution online through a direct mutual fund with adequate monitoring.
  16. Flexibility: Mutual funds today are very flexible. Depending on your investible surplus and goal, you can choose from a wide variety of mutual funds and choose how to set up your systematic investment plans or do lump sum. The ease of transaction, investing, execution, managing, and redeeming from mutual funds, makes them one of the easiest ways to invest in India.
  17. Tax Benefits on Mutual Funds: Today, as of July 2017, all mutual funds in India offer tax-free dividends, and all equity funds kept for more than one year become tax exempt. Short term capital gains for equity funds is taxed at 15 % for redemption in less than one year. Long-term capital gains for debt schemes are having two options: Lower of 10% on the capital gains without indexation benefit and 20 % on the capital gains after taking indexation benefit. Furthermore, short-term capital gains is taxed as per your particular tax slab.
  18. Transparency: Various websites, publications and rating agencies continuously monitor and display or publish the performance of most of the mutual fund schemes, thus making it easier and transparent for your to choose your type of mutual fund. From NAV, fund performance, benchmark indices and many ratios help in comparing each fund with the other in the respective category, thus making it possible to predict perhaps which fund would perform better in the future.
  19. So plan to buy mutual funds for their diversification, liquidity, professionally managed and comparatively small charges. You need to have a financial plan to be able to select or rather allow your financial planner to suggest you then, the best bouquet of mutual funds.
  20. Risk Appetite: You should consider doing a risk profiling test.This shall enable you to understand as to how much risk can you take with your money and what to expect based on your risk appetite. Without risk profile, it’s like asking your driver to drive your car at whatever speed he wants! That can put you at risk of an accident. Read – Are debt funds risky?
  21. Wealth Creation:  Time and Money can let you bring vast wonders for you, over an extended period. Say for 15-20 years. If you can be disciplined to stay invested, then diversified equity invested over a long term, can create wealth for you.

So, no matter what your risk appetite is, choose the right kind of mutual fund for your goals. This blog aims to make it easy for you to start investing in a mutual fund as a beginner.

Investing in Mutual Funds for Beginners

Investing in Mutual Funds for Beginners India

You would have read our earlier parts on this three-part guide:

  1. How to Invest in Mutual Funds- Basic Concept
  2. How can you benefit from mutual funds

In this part, we attempt to explain the doubts and the steps to start investing in mutual funds. With this simplified and easy “do-it-yourself” approach, you would be ready to start investing in mutual funds.

You may have heard from your friends or relatives or colleagues that they are investing in mutual funds. Some may talk well while others may have tried to share their (so called) bad experiences. Well, those good experiences are due to a systematic approach that they may have followed while those bad ones came due to no plan at all. The later ones would have started investing without any financial planning. They should have started with the following plan and would have got not only good but great results.

These steps are the real secrets to investing in mutual funds.

How to Invest in Mutual Funds

The 5 step approach to investing in Mutual Funds

  1. Goals: Having goal-based financial planning ensures that all your investments from now onwards are basis a goal and they are continuously monitored and executed as per a plan.Buying a car within six months can be a short term goal while retiring in 15-25 years can be a long term goal.
  2. Current investments: Map all your current investments, at its present value to each of your goals so that you know if there are some investments done by you which are orphaned ( don’t have any goal or you don’t know what you will get and when!)
  3. Risk profile: Knowing the correlation between your current financial conditions and your understanding of how you react to certain financial situations, determines your risk taking financial ability. So, a young investor could have a high-risk profile while a retired person could have a very conservative profile. Tools like Finametrica help a financial planner understand your risk profile on a very professional level.
  4. Time Horizon: Be sure of your time horizon, for each of your goals. Like for your retirement, 20 years, Buying a house can be five years or purchase a vehicle can be 12 months. Whatever may be the period, Do not change this goal-post. Be sure to write it down and look at it once in a year.
  5. Management: Implementation and Execution: Clear management of your funds brings transparency, review and reallocation. Continuously considering your investments with your financial planner brings commitment and audit of your goals versus your investments also. Looking at options in a review meeting as well as investing surplus money towards specific goals increases your satisfaction also.

Investing in Mutual Funds for Beginners – Checklist 

Despite being simple and easy, Online Mutual Fund Investment can appear to be complicated if you are not aware of where and how to start. Here is the precise step-by-step method:

  1. Bank Account: You must keep one bank account separately for investing and not your normal saving salary account.
  2. KYC and Now CKYC: Be sure to be KYC compliant. Visit https://camskra.com/ or https://www.cvlkra.com/  to register for your KYC. You have to provide a copy of your self-attested address proof, proof of identity and a recent passport size photograph. You can do all of this on any of these sites or through Registrar and Transfer agent or your registered mutual fund distributor at no charge.
  3. PAN: Your permanent account number is essential to invest any amount above Rs. 50,000/- in India.
  4. Aadhaar: AS of July 1st, 2017, you have to link your PAN with your Aadhaar. Do it here: https://incometaxindiaefiling.gov.in/e-Filing/Services/LinkAadhaarPrelogin.html
  5. Understand and define your goals
  6. Set your investment objectives: You need to identify your investment objectives regarding goals to investments. The purpose of investment in mutual funds with time horizons for each goal should be clearly mapped.
  7. Understand and outline your risk, and then the relevant respective expectations from your investment returns over the defined tenure.
  8. Portfolio Mix will be determined from your goals, time horizon, risk profile. Equity or Debt or Balanced. Monthly or lump sum, all such issues get resolved at this stage.
  9. FATCA: Make your simple online FATCA (Foreign account compliance act) declarations.
    1. Fatca Cams Link for new investor: https://www.camsonline.com/FATCA/COL_FATCAOnlineIndividualForm.aspx
    2. Fatca KARVY link for new investor: https://www.karvymfs.com/karvy/fatca-kyc.aspx
  10. One cancelled cheque from your bank account is needed to map your bank to your investments.
  11. Choosing your Funds: Go to the four-step approach and then start planning with your financial planner or investment advisor for direct mutual funds with online as an option. Be knowledgeable and confident so that you know where you are going, from where you are today and how you will get there!
  12. Set up, if necessary, SIP and ECS.
  13. Track and monitor your investments: There are various methods, but your investment advisor would know best as he is the right professional. But you have to track still and keep monitoring all your mutual funds to ensure they are in sync with your financial plan.
  14. Buy and Sell: be sure to know how and when to redeem and retrieve your investments into your bank account.

Top ways to derive maximum benefits from Mutual funds in India are: (some Myths and Facts)

  1. Past track record: Don’t go by past performance!
  2. Low Entry and Exit load: do make sure to take open-ended funds to avoid exit load charges.
  3. Expense Ratio: More for direct fund comparisons, do look for lowest when you have done other comparisons like ratios.
  4. Ratings: Five-star ratings can mean a lot but don’t go by only ratings.
  5. Switch: Don’t switch frequently and avoid charges.
  6. Study the fund managers reports and his consistency
  7. Analyse the ratios like alpha, beta, Mean, Standard deviation, Sharpe.

Now that you have got the steps right, and with all your necessary documents are ready to get started. Take the services of a Certified Financial Planner or a

SEBI Registered Investment Advisor while investing! Making a plan with the help of a financial planner in stage one gets you in the right direction. Furthermore, taking the help of a SEBI (Securities Exchange Board of India) Registered investment advisor (RIA) to invest in direct mutual funds shall give you the professional approach for execution and monitoring of your mutual funds as well.

With this approach and periodical review, you have begun your journey to accomplish your goals. Have patience and faith in your advisor and the planning process to reap the best benefits.

If you still have questions on How to Invest in Mutual Funds – add that in the comment section.

Happy Mutual Fund Investing!