How To Invest In Mutual Funds And Its Advantages?

What Is A Mutual Fund?

As per the website of Association Of Mutual Funds In India, mutual funds are trusts that collect investments from multiple investors sharing a common investment goal and put the funds in a common investment option. Fund managers decide where to invest these funds. Investors who are busy in their routine find it easy to invest in mutual funds with diversified portfolios (bonds, stocks, debentures etc.) to create an optimised risk-return ratio. Income generated from the investment is then distributed proportionately between the investors of the fund.

Read More About What is Mutual Fund?

How To Invest In Mutual Funds?

Here is a method you can follow to invest in mutual funds:

Understanding investor profile: It requires understanding your risk tolerance level as well as goals for investing. Based on your financial objective and time horizon, you can fix the investable amount and pick a mutual fund that matches your profile. Moreover, strategise your investment duration carefully. A high time frame will give higher returns than a short time frame. Similarly, a high time frame involves a higher risk than a short time frame. Before investing, you should have a particular goal; then only you will achieve that. But any wise person will choose mutual funds compared to FDs and PPF.

Choosing the suitable mutual funds: Secondly, you will have to select the right mutual fund – equity, debt, or hybrid, and its subcategories. Further investing in large-cap mutual funds will carry fewer risks than investing in small-cap or mid-cap mutual funds Once you decide whether you want to go with value investing or growth, you can pick the suitable mutual funds from the wide variety available, based on risk-adjusted returns, performance across market cycles, and expense ratio. These will help in optimising asset allocation.

Monitoring and rebalancing: Successful investing requires tracking your investment regularly and taking action to readjust it to your financial goals. It is called rebalancing. Portfolio rebalancing involves selling underperforming stocks and improving the overall risk exposure of the portfolio.

KYC for Mutual Fund

Investing in mutual funds has become simple with digitisation. Investors can complete the KYC process online and open a mutual fund in no time. Moreover, one doesn’t need a Demat to invest in mutual funds. KYC is a set of documents submitted by the investors that allow the AMC to evaluate the candidature of the investor. If you complete central KYC, then you don’t have to do it separately every time. It involves

1. Filled form
2. PAN card
3. Identity proof – Aadhar, Passport, Voter’s card, Driver’s license
4. Address Proof – Passport, Driver’s license etc. are considered valid proofs

Most AMC’s will help you complete CKYC when you invest through them. Once the CKYC process is done, you can start investing in mutual funds and set up a SIP plan by putting an auto-debit mandate in place. Every month (quarterly/bi-weekly as you set it), a fixed amount will get debited from your savings account towards mutual fund SIP.

Where to Buy Mutual Funds Online?

Although there are different investment websites – trading platforms, there are three main ways to buy mutual funds online.

Investment companies

The most obvious option is to buy investment funds directly through the investment companies that offer and manage them. Mutual fund companies range from listed giants like T. Different organizations provide a wide range of funds, ranging from passive index funds to actively managed stock funds to high-yield bond funds, all of which are meant to appeal to different investors and achieve different investing goals. One of the main advantages of buying directly from investment fund companies: the absence of sales commissions or brokerage fees. Most of your investment dollars go to the fund and the right to work for you. The main downside: Your investment opportunities are limited by this company’s family of funds.

Investment and financial services companies

Some investment companies allow you to utilize an internal account to purchase and sell mutual funds and exchange-traded funds (ETFs) offered by other companies if you don’t want to be limited to one family of funds. Vanguard Group and Fidelity Investments are the two best-known fund managers of this type, which have become full-fledged financial services companies, increasing their resources with competitors’ products. Hook: Of course, these companies want to increase their assets, so if you go “out of the family”, you can charge extra transaction fees or pay commissions.

Brokers

Another option is to open a web account at the dealership. This is probably the most expensive course: these types of accounts usually charge a transaction fee/commission for each transaction and may charge other account setup or maintenance fees. However, they offer the largest pool of mutual funds to choose from. Finding an account with low fees is quite easy, especially when combing the ranks of discount brokers. With low overheads and largely automated services, their operating costs are significantly reduced, and this is reflected in their charges to consumers.

Mutual Funds Investment Cost

• Expense Ratio: An important indicator for investors, the expense ratio represents the percentage of average assets under management used by Asset Management Companies to pay operational costs. These include administrative expenditures, fund management fees, and distribution charges, which all impact total returns.
• One-Time Charge/Transaction Fee: Investors may incur one-time charges or transaction fees, particularly for smaller contributions under ₹10,000, which affects the cost-effectiveness of such transactions and contributes to the fund’s running expenditures.
• Exit Load: Designed to discourage short-term investments, the exit load is imposed when investors leave quickly from a mutual fund scheme. Calculated as a percentage of NAV, it serves to reduce the impact of frequent withdrawals on fund performance.
• Securities Transaction Tax (STT): Upon selling mutual fund units, investors face the Securities Transaction Tax (STT), with rates varying among different schemes. Close-ended schemes and ETFs generally incur a lower percentage compared to open-ended equity-oriented schemes.
• Stamp Duty: Stamp duty, a direct government tax, applies to the issuance and transfer of Mutual Funds, impacting the cost structure for investors in various transactions, including purchases, fresh instalments, and transfers between Demat accounts.

Types Of Mutual Funds

Here is a broad classification of popular types of MF schemes.

• Equity funds – These MF schemes invest majorly on company stocks/shares, involve higher risk and return. The return on these funds depends on market performance.
• Debt funds – For investors with a low-risk tolerance, debt funds MFs invest in several bonds, debentures, government securities, and other financial instruments that generate assured earning.
• Money market funds – These funds invest in T-bill, Commercial Papers and other liquid investments. Investors considering parking their surplus funds for immediate but moderate returns invest in these schemes.
• Index funds – These funds invest in securities in a market index to generate similar returns.
• Income funds – Income fund MFs invest in income-generating instruments like debentures and bonds to create a source of fixed income for the investor.
• Speciality funds – These represent a cluster of mutual funds that invest in specific sectors and various other market segments to generate a high return.
• Balanced or hybrid funds – As the name suggests, hybrid funds invest into a mix of asset-classes for a balanced risk-return.
• Fund of funds – These types of mutual funds actively invest in other mutual funds. The return depends on the performance of these funds. These are also called multi-manager funds.
• Tax-saving funds (ELSS) – These MF schemes invest in equities and stocks that qualify to receive tax benefits.
• Pension funds – Pension funds invest in creating a regular stream of income for the investor after retirement. It generates a balanced return by investing in shares and fixed income-generating funds.
• Fixed maturity funds – Fixed maturity funds invest in debt and money market instruments of fixed tenure.
• Exchange-traded funds – They are traded as units like mutual funds as a combination of investments but unlike mutual funds, they can be traded on a stock exchange.)

Advantages Of Mutual Funds

There are several advantages packed into mutual fund investment, apart from returns.

• Diversification – Mutual funds solve the problem by offering immediate diversification beyond the abilities of a general investor. The fund manager researches the market and creates a balanced portfolio.
• Liquidity – Investing in open-ended mutual funds allows high liquidity. In open-ended mutual funds, investors can redeem stocks in the funds through a registered stockbroker. Some funds may come with a lock-in like ELSS funds, which offers tax savings.
• Customizability – Another important factor that added to the popularity of mutual funds is customizability. Based on your investment goals or risk tolerance levels
• Safe & Transparent – The new SEBI guidelines require the mutual funds to be colour-coded to indicate the level of risk associated with the fund. It makes the entire process secure and transparent even to new investors. Mutual funds use three colours to indicate the risk level of the fund. Blue indicates low risk, yellow depicts the medium risk and brown means high risk
• Cost-Effective – Mutual funds collect funds from different investors then invest the corpus into a portfolio. Hence, the investment cost is lower than stock market investment, where you need to pay transaction fees on every transaction.
• Tax Savings – ELSS mutual funds offer tax benefits u/s 80C of the Income Tax Act up to Rs 1.5 lakh in a year. ELSS mutual funds deliver higher returns than PPF, EPS, and tax savings index and offer tax benefits.
• Lower Lock-in – Equity-linked saving schemes have a lock-in period of three years, lower than the five-year lock-in period for FD, ULIPs, and PPF. Investors also have the option to remain invested even after the lock-in. SIP in mutual funds allows investors to select investment amount and tenure as per convenience, and there is no early withdrawal penalty like with other investment types.
• Advantage of SIP – You can leverage the power of SIP by regularly investing in the share market through mutual funds and take advantage of rupee cost averaging. SIP refers to methodical investment through all market conditions to benefit in the long run.

You can select SIP frequency, ticket size, and even increase or decrease SIP amount to suit your needs. Mutual funds allow investors to switch funds to a better performing scheme, usually at a much lower cost.

With mutual funds, one doesn’t need to time the market.  Mutual Funds allow investors to invest through SIP and leverage the benefit of rupee cost averaging in the long run. You accumulate NAV according to market conditions, which keeps adding to your portfolio. When the market is booming, you receive fewer units than when NAV value is less. Therefore, over the long run, the cost of purchasing units gets averaged out. Hence, with mutual funds, you can invest any time, regardless of market condition.

Well-regulated – Mutual funds investment is regulated by SEBI and RBI. Also, the Association Of Mutual Funds In India (AMFI), a self-regulatory body formed by all the asset management companies oversees fund plans and management. It makes mutual funds investment safer compared to other forms.

Invest a Lump Sum in Mutual Fund Schemes

Investing a substantial amount in a mutual fund scheme in a single transaction, known as a lump sum investment, stands in contrast to systematic investments. This strategy applies to both direct and regular plans. To navigate this approach effectively, consider these steps:

• Select a Suitable Scheme: Research diverse mutual funds, examining their historical performance. Align your choice with financial objectives, risk tolerance, and investment goals.
• Select a Credible Fund House: Choose a fund house with a robust track record and dependable customer service.
• Initiate a Mutual Fund Account: Easily set up a mutual fund account using online platforms or with broker assistance.
• Specify the Investment Amount: Evaluate affordability, ensuring the invested amount is not immediately required.
• Transfer Funds: Make the investment process easier by moving funds online or via a broker.
• Consistently monitor fund performance, making periodic modifications to the portfolio to maintain the appropriate asset allocation.

Points to Keep in Mind Before Investing in Mutual Funds

Before diving into the world of mutual funds in India, it’s essential to keep a few key points in mind to make informed decisions that align with your financial goals. Mutual funds offer a diversified investment opportunity, but there are some nuances you should be aware of.

• Objective Clarity: Before investing, it’s crucial to understand your financial goals. Are you investing for wealth creation, retirement, or a short-term goal? For instance, if you’re looking to build a retirement corpus, opt for equity-oriented funds like diversified equity funds, which have historically offered better returns over the long term.
• Risk Tolerance Assessment: Assess your risk appetite. Mutual funds come with various risk levels. For instance, if you’re risk-averse, consider less volatile debt funds, whereas Equity-Linked Saving Schemes (ELSS) could be suitable if you can bear market fluctuations and desire tax benefits.
• Fund Selection: Choose the right fund category based on your objectives and risk profile. For example, if you’re seeking capital appreciation, large-cap equity funds may be your choice. Small-cap or mid-cap funds, on the other hand, can offer the potential for higher returns but with higher risks.
• Expense Ratios: Look at the expense ratios. Lower expenses can enhance your overall returns. For instance, if Fund A has an expense ratio of 1.5% and Fund B has 0.5%, over time, Fund B is likely to yield better returns for you.
• Past Performance and Fund Manager: Consider a fund’s historical performance and the expertise of its fund manager. A fund with a consistent track record and an experienced manager may be a more reliable choice.
• Diversification: Diversify your investments across different asset classes and funds. This can reduce risk. For example, owning a mix of equity, debt, and hybrid funds can help spread risk and provide more stability.
• Consider Investment Horizon: Assess your investment horizon, whether short-term, medium-term, or long-term. Different mutual funds are suitable for varying time frames. For long-term goals like retirement, opt for equity funds to benefit from potential capital appreciation.
• Stay Informed and Review Regularly: The mutual fund landscape evolves. Stay updated on economic and market trends, fund performance, and regulatory changes. Also, review your portfolio periodically to ensure it aligns with your financial goals and make adjustments as necessary.

Conclusion

Mutual Funds have all the advantages to be a popular investment vehicle as well as an opportunity for fund managers to generate high income without large investments from their own pockets.

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