How to invest in mutual funds in India?

The mutual fund industry is a type of investment vehicle that pools funds from many investors to invest in securities like stocks, bonds, money market instruments, etc. Professional money managers manage mutual funds, allocating the assets and attempting to produce capital gains for investors. Mutual fund portfolios are structured and managed to match the investment objectives outlined in their prospectuses.

Individuals and small businesses can invest in mutual funds, which give them access to professionally managed portfolios of stocks, bonds, etc. Shareholders share the gains or losses of the fund proportionately. Generally, the performance of mutual funds is based on the change in the total market cap of the fund, which is derived by aggregating the performance of the fund’s underlying investments.

 

How to invest in mutual funds?

Figure out the purpose of investing

This is referred to as the first step in investing in mutual funds. Investment goals can range from buying a house to saving for a child’s college education, planning for a wedding, or retiring.

Complete the Know Your Customer (KYC) requirements

KYC guidelines must be followed by investors before they can invest in mutual funds. As specified by the fund house, the investor must submit copies of their Permanent Account Number (PAN), proof of residency, and age proof.

Be aware of all schemes available

There are a lot of mutual fund options available on the market. An investor can find a fund that suits almost every need. Take the time to explore the market and understand the various types of investment schemes before you invest.

Keep in mind the risk factors

Investors should keep in mind that mutual funds come with a set of risks. Often, high-yielding schemes come with higher risks.

 

How to invest in mutual funds through Demat Account?

Demat Accounts enable you to hold securities in a ‘dematerialised’ / digital form. Demat accounts can be used to hold multiple types of securities including stocks, bonds, mutual funds, etc.

Mutual fund Demat accounts are relatively hassle-free and easy to open. Ensure that you select a Demat account provider for mutual funds and submit all the necessary documents like identification proof, passport size photos, and proof of residency after selecting a DP. PAN cards and in-person verification are mandatory. After the account submission is complete, you will receive the document for terms/conditions and charges. Documents will be verified by the DP staff. Upon completion of the process, a password and account number are sent to the email address provided.

Demat accounts are accounts that are used for holding securities in dematerialized form. The account holds exchange-traded funds, stocks, bonds, mutual funds, and government bonds. Trading or investing in shares requires a Demat account, even though it is not mandatory for investment in funds.

 

How to invest in mutual funds through online SIP?

Once you know how much and when to invest, a systematic investment plan (SIP) becomes easy. The process is easy – just complete the KYC formalities, open an account, and start investing! There may be times when you would like to invest a large amount, but you cannot afford the full amount at one time. The direct plan of a mutual fund allows you to invest in various mutual fund schemes without paying a commission or brokerage fee. Direct plans can be purchased at a branch office of a mutual fund by completing an application form by hand.

Steps to open SIP Online

1. Collect Necessary Documents
2. Be KYC Compliant
3. Register / SIGN Up with the AMC website
4. Decide Investment Amount and Scheme Plan and Option
5. Decide Payment Mode and Date
6. Submit Transaction

 

How to invest in in debt mutual funds?

Lending money to an entity issuing a debt instrument can be considered as buying the instrument. Debt funds invest in fixed-interest generating securities such as corporate bonds, government securities, Treasury bills, commercial papers, and other money market instruments. A debt fund’s fundamental purpose is to generate a steady interest income and capital appreciation. Debt instruments are pre-determined in terms of the interest rate and maturity period by their issuers. Fixed-income securities are also called debt instruments.

Key Points to keep in mind when investing in Debt Funds

1. Your current asset allocation and risk tolerance
2. The market environment
3. Expense Ratio and exit loads

 

How to invest in ELSS online?

Mutual funds in India offer Equity Linked Savings Schemes (ELSS), or diversified equity funds with a three-year lock-in period. ELSS are eligible for deductions under Section 80C and can be invested like any mutual fund. You can invest them online through an investment service account. It is possible to invest as a lump sum or through SIPs (systematic investment plans). Through SIP, consistency and discipline are ensured, as well as the minimization of capital risks.

 

How to invest in STP mutual funds?

Systematic Transfer Plans (STPs) allow a predetermined amount to be transferred from one mutual fund scheme to another scheme at fixed intervals. These plans offer consistent returns. Through STP, investors can earn consistent returns because their money is invested in debt/liquid funds that generate interest income until the full amount of their money is not transferred to equity funds.

The following steps can be taken to invest in STP in mutual funds:

• In order to complete your STP form, please go to the office of the AMC. A mutual fund house website allows you to fill out this form online.
• Make your long-term investment in a mutual fund scheme (destination fund).
• For a lump sum investment, a mutual fund scheme (source fund) can then be selected.
• In the destination fund, a lump sum may be invested over a specified period of time. Depending on your comfort zone, you can choose daily, weekly, or monthly STPs.

 

How to invest in international mutual funds?

International funds invest in companies located anywhere in the world outside of the country of their investors. Global funds, on the other hand, can invest in companies located anywhere in the world. International funds are sometimes referred to as foreign funds.

It is the same as investing in any other equity mutual fund to invest in international mutual funds. Investments are made in rupees, and investors receive units of the funds as a return. It is invested in stocks of companies that are listed on exchanges outside of India by the fund manager. The fund manager can invest your money in foreign stocks in two different ways.

• You can build your portfolio directly by purchasing stocks
• Alternatively, you may invest in an existing global fund that already has a pre-designed portfolio of foreign stocks.

 

How to invest a lump sum in mutual funds?

An investment in a mutual fund in a lump sum refers to a one-time investment of a single, bulk amount. It is not spread out over time like a SIP (Systematic Investment Plan).

Popular players and investors prefer to make lump-sum investments in mutual funds, as their capital creation is largely dependent on the appreciation of company stocks. A lump sum mutual fund investment can be a good option for investors with a large investment amount and a high level of risk tolerance.

Imagine you receive an unexpectedly large bonus for one year. Once you have set aside money for all your pre-planned commitments and investments, you still have Rs.48,000 left to invest. This amount is in excess and you have no specific plans on how to use it. Therefore, you decide to take a risk. It would be possible to invest the entire amount in a single mutual fund scheme of your choosing. It may be different than investing Rs.4,000 every month for a year.

 

Mutual funds: How do they work?

Investing in mutual funds is like owning a company at the same time. Though it may seem strange, this dual nature is no different from the way an AAPL stock represents Apple Inc. By purchasing Apple stock, an investor is buying a portion of the company’s assets and earnings. Similarly, a mutual fund investor invests in a company that owns assets and part of the company. There is a significant difference between Apple and mutual fund companies: Apple makes innovative devices and tablets, whereas mutual fund companies make investments.

How the investors earn a return from the mutual fund is mentioned below:

• In the fund’s portfolio, dividends are earned on stocks and interest is earned on bonds. It is common for funds to pay out nearly all the income they receive to fund owners in the form of a distribution. Investors often have the option of receiving a distribution check or reinvesting the earnings.
• Whenever the fund sells securities that have appreciated at price, it has a capital gain. Investors are usually repaid for their capital gains through distributions.
• The price of the fund’s shares increases if fund holdings rise in price but are not sold by the fund manager. Your mutual fund shares can then be sold on the market for a profit.

Mutual funds can be viewed as virtual companies, with the CEO serving as the fund manager, sometimes referred to as an investment adviser. Mutual fund managers are hired by boards of directors and are legally obligated to act in the best interest of mutual fund shareholders. The one who manages funds is also the owner of the fund.

Most mutual fund companies have a very small staff. A fund manager or investment adviser may employ analysts to help pick investments or conduct market research. To determine if share prices increase or decrease, a fund accountant calculates the NAV, the daily value of the portfolio. To comply with government regulations, mutual funds need a compliance officer or two and probably an attorney.

There are hundreds of mutual funds in the biggest investment companies. Most mutual funds are part of a larger investment company. The Vanguard Group, T. Rowe Price, and Fidelity Investments are all well-known names among these companies.

 

Different types of mutual funds

There are various types of mutual fund sections based on their investment strategy and the types of securities they have targeted for their portfolios. There is a fund for almost every type of investor or investment approach. In addition to mutual funds, there are money market funds, sector funds, alternative funds, smart-beta funds, target-date funds, and even funds of funds, or mutual funds that buy shares in other mutual funds.

Equity funds

The biggest section is that of equity or stock funds. As the name shows, this kind of fund invests majorly in stocks. There are various subcategories among this group. Small, mid, or large-cap equity funds are named after the size of the companies they invest in. Other types include aggressive growth, income-oriented investments, value investments, and others. There are also equity funds that invest in domestic (U.S.) stocks and those that invest in foreign stocks. There is a wide range of equity funds as there are many different types of equities.

Fixed income funds

The Fixed Income Category is another big category. A fixed-income mutual fund aims at investments that pay a constant rate of return, such as government bonds, corporate bonds, or other debt instruments. The concept is that the fund portfolio generates interest income, which it then forwards to the shareholders.

Index funds

Another group, which has become incredibly well known over the most recent couple of years, falls under the moniker “record reserves.” Their investment system depends on the assumption that it is exceptionally hard, and commonly costly, to reliably attempt to beat the market. In this way, the index fund manager purchases stocks that relate to a significant market index like the S&P 500 or the Dow Jones Industrial Average (DJIA). This technique requires less exploration from investigators and advisors, so there are fewer costs to gobble up returns before they are given to investors. These assets are frequently planned considering cost-sensitive finances in mind.

Balanced funds

Balanced Funds put resources into a hybrid of assets, whether stocks, securities, currency market instruments, or other investments. The goal is to decrease the risk of exposure across asset categories. This sort of fund is also referred to as an asset allocation fund reserve. There are two varieties of such funds intended to take care of the investor’s targets.

Some funds are characterised by a particular allocation tactic that is fixed, so investors can have an anticipated exposure to different resource classes. Different funds follow a procedure for dynamic allocation rates to meet different investors’ targets. This might include responding to economic situations, business cycle changes, or the changing periods of the investor’s own life.

Money market funds

The money market consists of safe (risk-free), short debt instruments, mostly government Treasury bills. This can be a secure place to park your money. You won’t get substantial returns; however, you won’t need to worry about losing your principal. A typical return could be a little over the amount you’d earn in an exceedingly regular checking or bank account and a bit lower than the common certificate of deposit (CD). Whereas money market funds invest in ultra-safe assets, throughout the 2008 financial crisis, some money market funds did experience losses when the share worth of those funds, typically pegged at $1, fell below that level and broke the buck.

Income funds

Income funds are known for their use: to provide current income constantly. These funds invest majorly in government and high-quality corporate debt, holding these bonds until maturity to provide interest streams. While fund holdings may appreciate, the main objective of these funds is to ensure a constant cash flow​ to investors As such, the audience for these funds includes conservative investors and retirees. As they generate regular income, tax-conscious investors might give a thought about avoiding these funds.

International/ global funds

Funds investing in international assets are those that are located outside of a person’s country of residence. On the other hand, global funds can invest anywhere in the world, including within the country where you live. The funds haven’t historically been classified as safer or riskier than domestic investments, though they have often been more volatile and pose unique country and political risks.

Speciality funds

A mutual fund categorised in this manner is more of an all-encompassing category that includes funds that have been popular but don’t necessarily fall into the more rigid categories. In these types of mutual funds, broad diversification is sacrificed in favour of focusing on a targeted sector of the economy.

Exchange-Traded Funds (ETFs)

An exchange-traded fund (ETF) adds a twist to the mutual fund. In addition to pooling investments and employing mutual fund strategies, they are structured as investment trusts that are traded on stock exchanges. Thus, they have many of the features of stocks and at the same time, they are more popular than mutual funds. An ETF, for instance, can be purchased and sold at any point in the trading day.

 

Benefits of investment in mutual funds

Investment vehicles such as mutual funds, which are professionally managed, compound your money over time. The investments you make in mutual funds may include equity, debt, money market, etc., allowing you to earn high returns on your money. Investing in mutual funds has several benefits, and we have outlined some of the top ones below for you:

Professional management

The money you invest in a mutual fund is managed by professional fund managers who research and keep a close eye on the market, identify the right stocks, and buy and sell them at the right time to generate a positive return on your investment. In addition, fund managers analyse the performance of companies before investing in their shares. The scheme information document (SID) you receive when you buy units of a mutual fund scheme also specifies the number of years of work experience of the fund manager, the type of funds he or she manages, and the performance of the funds under his or her management.

Higher returns

By investing in a variety of instruments, mutual funds provide higher returns on your investment than term deposits like Fixed Deposits (FDs) and Recurring Deposits (RDs). Mutual funds invested in equity are highly rewarding for investors but they are accompanied by high risks as well, and hence, are suited to investors who have a high appetite for risk. In contrast, debt funds offer lower risk and better returns than term deposits.

Diversification

A mutual fund’s greatest benefit may be diversification. Mutual funds reduce risk by diversifying their portfolios by investing in a variety of asset classes and stocks. So, even if one asset performs poorly, the performance of other assets can compensate, so you can enjoy a positive return on your investment. If you want to further reduce your risk, you can diversify your portfolio by investing in different types of mutual funds. Investing in mutual funds and diversifying or balancing your portfolio can be tricky if you do not know what to do.

Convenience

Fund houses that offer online investing have made investing in mutual funds quick, convenient, and hassle-free. With just a few clicks of a button, you can start investing in a mutual fund scheme. Moreover, the KYC process can now be done online and investors can invest up to Rs.50,000 with the help of e-KYC. However, for investments of more than Rs.50,000, it’s compulsory for the investors to complete the physical KYC process.

Low cost

Mutual funds can be invested in as low as Rs.5,000 (lump sum) and Rs.500 (Systematic Investment Plan). Investing can be started without accumulating a large sum of money. You also do not have to pay any additional commission if you invest in a Direct Plan of a mutual fund scheme.

Disciplined investing

Mutual funds provide a facility called Systematic Investment Plans (SIPs) that cultivates a habit of regular investing. A SIP (Systematic Investment Plan) enables investors to invest small amounts regularly, on a weekly, monthly, or quarterly basis. For your SIP, you can set up an auto-debit facility to automatically deduct a fixed sum from your bank account each month. Investing regularly and without having to manually invest every time is made easy with SIPs.

 

What points should you keep in mind as a first time investor?

Pick one mutual fund

For you to choose the right investment, you have to analyse and compare all the mutual fund schemes available in each category. Investors must consider a number of factors before selecting a mutual fund, such as the fund manager’s credentials, expense ratio, and portfolio components.

Choose the suitable fund type

To decide on the right mutual fund category, one must do more than read about the different types. For first-time investors, experts usually recommend a balanced or debt fund, as it carries minimal risk and offers steady returns.

Choose SIPs instead of lump-sum investments

The first time investors in equity instruments are advised to use systematic investment plans (SIPs). If you invest in a lump sum, you may miss an investment peak, but if you invest through a systematic investment plan, you can invest over time and across market levels. With rupee cost averaging, SIPs also help you earn higher returns over the long run by averaging out the cost of your investment.

Stick to an investment goal

You should define your financial goals, your budget, and your time horizon before making investments. Organising your finances in this way will help you figure out how much money you should put aside for investing and how much risk you should take on. The best investments are made with a purpose in mind.

Modify your portfolio

Diversifying your portfolio and earning risk-adjusted returns can be accomplished by investing in more than one mutual fund. Diversifying your investments across asset classes and styles is possible with a portfolio of funds. This will also even out your portfolio’s risk – when one mutual fund underperforms, the other funds make up for it, preserving the value of your portfolio.

Take advice from a financial advisor

It can be a hassle and overwhelming process to invest in mutual funds. It is crucial to monitor the performance of the mutual funds with thousands of options to choose from. If choosing the right mutual fund is proving to be a herculean task, seek the help of a mutual fund expert or distributor.

Open a net banking account

Internet banking must be activated on your bank account before you can invest in mutual funds. In addition to debit cards and checks, mutual funds also allow investments to be made through net banking, which is a straightforward, fast and secure way to invest.

KYC documents must be updated

A mutual fund cannot be purchased if the Know Your Customer (KYC) process has not been completed. India’s KYC legislation identifies the source of funds and prevents money laundering by preventing financial transactions. PAN cards and valid address proof are needed to become KYC-compliant.

 

FAQs

What is the best way to invest directly in mutual funds?

The AMC (Asset Management Company) branch office can help you invest in direct funds. In order to complete KYC, you must submit self-attested identification and address documents. After selecting the right mutual fund scheme, fill out the standard application form or SIP (Systematic Investment Plan) form depending on the investment mode.

What are the best ways to invest in mutual funds short term?

Investors who wish to invest for a short period (15 days or less) should consider liquid funds, whereas those who wish to invest in funds with a maturity period of 2 months to 4 months should consider ultra-short-term mutual funds.

Can beginners invest in mutual funds in India?

A mutual fund house or an intermediary (broker) can help any beginner invest in mutual funds offline or online. A mutual fund platform online is also available for mutual fund investments. You can invest Rs 10,000 in a mutual fund by selecting the amount to invest and the mode as One Time.