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How to invest in Mutual Funds?

Identify your objective of investing in Mutual Funds. It can be capital appreciation, capital protection, tax-saving, exposure to equity, long-term growth, short-term liquidity and many more. You need to understand whether it is any one of the goals or a mix of all.

Once you know your objective, you should find out the optimal asset allocation to achieve this. It has to be a mix of equities, debt, money-market instruments to have a balanced mix of growth, safety and liquidity.

Find out the fund that invests in the same asset classes as desired by you and in alignment with your investment policy.

Decide on the schemes you would like to invest and complete the KYC and application procedure.

Types of Mutual Funds

Equity funds

Equity Funds invest more than 60% of the assets in listed equities. Rest of the funds are invested in debt securities to balance the risk profile and support redemption. These funds are riskier but generate high-return over a long-term. Here are a few Equity mutual fund types:

  • Capitalization based: Equity funds can be Large-cap, Small-cap or Mid-cap based on the capitalization of the stocks in which it invests.
  • Tax-Saving: Equity Linked Savings Schemes have a lock-in of 3 years and the investments are eligible for exemption under section 80C.
  • Sectoral/Thematic Funds: These funds invest in stocks of a particular sector only, say FMCG, Banking, IT or Infrastructure. The returns of these funds depend directly on upon the performance of the particular sector.
  • Diversified Funds: The scheme invests funds in equities across sectors and capitalization. The risk factor is well-distributed in this fund.
  • Index-based Funds: The allocation of assets for these funds replicate a particular index listed on the stock exchange, let’s say the Sensex or Nifty.

Debt Funds

This mutual fund type is less risky and invests in debt-market instruments like bonds, debentures, government securities and other fixed income securities. Debt funds can be short-term or long-term. The returns will be in the form of interest income and capital appreciation. Various types of debt funds are:

  • Fixed Income fund: The scheme invests money only in fixed-income assets like bonds or debentures. The sole purpose of this fund is to offer capital protection and assured returns.
  • Gilt Funds: Gilt fund invests money primarily in Government securities over long-term. Government debt is normally devoid of credit-risk.
  • Money Market Funds: Money market assets such as Certificate of Deposit (CD), Commercial Paper (CP), Call Money and T-Bills, are highly liquid and risk-free.

Hybrid Funds

Hybrid or Balanced Funds are schemes which invest money across asset classes. In some cases, the exposure to equities is more than debt securities, while in other cases it is vice-versa. The rationale behind the allocation of assets is to strike an ideal balance between risk and returns.

Why should you invest in Mutual Funds?

(1) Diversification: Diversification is an important act in portfolio management which means including several assets classes in order to mitigate risks. Through Mutual Funds you can achieve this easily because your money is invested across a wide base of asset classes, that too without even the need of parking a large amount of money.

(2) Liquidity: The ease of entry and exit in an investment avenue is the biggest convenience factor. In a mutual fund, you can purchase a scheme easily and after a short period, you can also sell and get out that scheme is a hassle-free way. High degree of liquidity is one of the biggest advantages of mutual funds.

(3) Professionally Managed: Mutual Funds are professionally managed by some of the best Fund Managers in the country. So instead of worrying about which asset to invest in, you can choose a fund which has a good track record over the years and entrust the rest to the expert fund manager.

(4) Simplicity in tracking: Once you invest your money in an asset, you must track its performance regularly. However, many a times, the information is not available easily and the investors find it difficult to track even if they want to. For Mutual Funds, the information is easily accessible and the returns can be tracked over a period of 1 year, 3 year, 5 years and 10 years.

(5) Flexibility: One of the biggest benefits of a mutual fund is to start with an amount as low as Rs 500. This low threshold attracts investors from kinds of income level and helps in capital formation.

(6) Safety and transparency: Investment in Mutual Funds is safe as well as transparent. Most of the leading funds come under the purview of SEBI guidelines and are required to abide by the disclosures mandated by the industry body.

(7) Cost efficient: Instead of buying one or two units, buying mutual fund in bulk is also cost-efficient. Just as we get discount on bulk purchases in retail stores, the processing fees and charges also reduces on bulk purchase of mutual funds. Expense ratio or the fee for managing your fund is also a key determinant in judging the performance of the fund.

(8) Suitable for most financial goals: As an investor, you could be having various life goals such as purchase of house, purchase of car, marriage, travel, higher education of children, healthcare etc. The investments in mutual funds can be planned according to these goals and risk-appetite. You can fulfil your goals by choosing a mutual fund that matches your income, expenditure, life goals and risk-tolerance.

(9) Hassle-free process: Once you choose your desired fund and submit the required documents, you can be assured that your funds will be managed by professionals who strive to beat the benchmark returns consistently years after years.

(10) Tax-efficiency: With the latest Budget notifying that the LTCG will be taxed in case of mutual funds, there are ways in which mutual funds can help you to beat taxes. Schemes like ELSS has the ability to give more tax-adjusted returns than the traditional Fixed Deposit.

Points to consider before investing in Mutual funds?

Identify your objective: One of the biggest factors to be considered before investment in Mutual Fund is to identify your objective. You should have a clear roadmap of your financial goals in life along with the timelines. Once you set specific and measurable goals, it becomes simpler for you to decide whether you want to go for Mutual Funds or which particular scheme you should opt for.

Assess your risk appetite: This requires a reality check. You need to introspect honestly to find out which how much risk are you willing to shoulder and at what stage. You may be willing to take larger risk in the first 15 years of your work life but opt for more conservative investment vehicles in the later stages. Along with this, you also need to be aware about the risk associated with the various asset classes. A realistic assessment of your risk profile provides clarity in mind as to which schemes or asset classes you should opt for.

Educate yourself about various schemes: Mutual Funds have sea of options. In this digital age, there is no dearth of resources. You can browse websites, apps and blogs to educate yourself and do a thorough research on the various schemes available in the market. Even if you opt for the services of a Relationship Manager, you need to do your homework well so that you are alarmed if they try to misguide you. Knowledge about various schemes will help you to do a self-screening and align your objectives to your investment avenues.

Arrange for the KYC fulfilment: Whenever you opt to invest in Mutual Funds, you will be required to complete certain formalities and documentation process. This is known as the KYC process. For that you need to keep your identity proof such as PAN card, Adhaar Card, Passport, Address verification document, Age proof etc. ready with you. The copies of these documents need to be submitted during the application stage of the mutual fund.

Modes of investment in Mutual Funds

There are different ways in which mutual fund investments can be made. They are:

Offline Mode via Fund House

You can invest in Mutual Funds by directly visiting the nearest branch of a Fund House. All you need to do is to carry the required documents. The copy of the below documents are required for the KYC purpose-

  • Residence Proof
  • Proof of Identity
  • Cancelled Cheque
  • Passport Size photograph

You will need to fill up the application form duly provided by the fund house, which you will need, along with the required documents.

Offline investment through a broker

A mutual fund broker or a distributor is an intermediary who guides you to choose the appropriate mutual fund scheme and helps you to complete the documentation formalities for the application process in lieu of a fee. A broker will provide you with the detailed information you need to make your investment such as the features of the scheme, the return potential, associated risks, and the documents required to complete the application process.

Online: Through website

These days fund houses have their official websites through which you can invest in mutual funds directly. Direct investment also eliminates the need for brokers and distributors. You can log onto the official website of the fund house, choose your desired fund, fill up the application form and furnish the soft copy of the necessary documents. After an e-KYC, your application is processed, and you can start your investment in the desired fund. Many banks, acting as a distributor, also offer the option to invest online and directs the investor to the fund house’s website.

Online: Through an app

Nowadays, most fund houses have an app through which investors can invest in the fund of their choice. This is quite a convenient option and it allows investors to invest in mutual fund schemes, buy additional units or start the redemption process, check account statement, folio number and other details pertaining to the account. Leading fund houses such as AXIS mutual fund, HDFC, Kotak Mutual Fund, ICICI Prudential, Birla Sun Life etc. encourage investors to use the app for investing and managing their mutual fund investments. There are also options like myCAMS which enables investors to access their investments from various fund houses at a single place.

Frequently asked questions

(1) What are the various modes of investment in Mutual Funds?

You can invest in Mutual Fund through various modes: Offline through Fund House and broker, Online through distributor or official website of the fund house and also through an App.

(2) What is most hassle-free way of investing in Mutual Funds?

Online investment through website or fund house is the most quick and hassle-free way of investing in Mutual Funds.

(3) What are the advantages of investing in Mutual Funds?

Investing in Mutual Funds is the safest way to participate in equity markets, it inculcates a disciplined investment habit and it is quick & hassle-free. It is also affordable as you can start with as low as Rs 500. Exposure to wide variety of asset classes is another advantage of investing in mutual funds.

(4) What is KYC?

KYC or know your customer is a process mandated by the SEBI. It refers to the verification of authentic documents submitted by an investor to a Fund House. This is done to ensure transparency and authenticity in the investment process.

(5) Can I see all my fund details at one place?

CAMS app is a centralised place wherein you can access the details of all your investments through various fund houses at one place.

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