How To Start Investing in Mutual Funds Part 1

One of the most accessible and reliable ways to invest in equity or debt instruments is through mutual funds. The returns may be volatile depending on the funds selected in your mutual fund portfolio. 

However, creating a mutual fund portfolio requires several steps. In this chapter and the next one, we will learn all the details of building an investment plan using mutual funds. In this journey, the first step is to choose a mutual fund platform from which to invest. So, let’s start by understanding which platform is suitable for you. 

Mutual Fund Platforms

A mutual fund platform is an online service or platform that allows investors to buy, sell, and manage their mutual fund investments. 

It serves as a link between investors and various mutual funds offered by different asset management companies. You want a platform that makes investing in mutual funds easy, convenient and transparent.

Some features to look for in good mutual fund platforms include:

• The interface is intuitive to facilitate straightforward navigation and information access.
• Many funds are available across all categories, such as equity, debt, hybrid, index funds, etc.
• Instant deal, SIP, redemptions, etc. process.
• Prompting tracking and analysis of your investments using tools such as portfolio tracker, performance analytics, etc.
• A safe platform with security features such as 2-factor authentication, data encryption, etc.
• Very reasonable Pricing is reflected by low transaction charges, account charges and so on.
• Customer service is available to address the investor's questions and problems as quickly as possible.

Mutual fund platforms enable investors to manage their portfolios efficiently without necessarily depending fully on intermediaries such as distributors. The platform serves as a single-point solution for the investment requirements.

Factors in Choosing a Mutual Fund Platform

Many parameters need to be assessed when choosing a mutual fund platform. Some key considerations are:

1. User-friendly Interface

A clean, intuitive user interface that makes navigation easy is vital, especially for new investors. An optimised mobile app, along with the desktop site, offers flexibility. Simple menus, easy access to account details, transactions and support resources enhance user experience.

2. Fund Selection and Variety 

A robust platform would house funds from leading AMCs across categories - equity, hybrid, debt, index funds, global funds, etc. The variety allows investors to diversify and align investments to financial goals. Easy filters, search tools, and comparison features help with fund selection.

3. Transaction Convenience

Seamless investment options are available via a lump sum, SIP, switch or redeem with fast settlement times. The presence of Autopay and paperless options, as well as real-time order status tracking, offers a smooth investment journey.

4. Costs and Fees 

Comparing fee structure across platforms is wise. This includes account opening, annual maintenance, transaction charges, and advisory fees. Optimal costs ensure a better investing experience and returns.

5. Security Measures

The safety of personal and financial information is critical. Robust encryption, 2-factor authentication, and PAN-based login are essential security tools. The grievance redressal process also needs to be strong.

6. Customer Support

Timely response to queries and issues through email, chat or call support improves customer satisfaction. Self-help features like FAQs and chatbots are also useful.

7. Performance Tracking 

Tools to track investments, such as portfolio summaries, rate of returns analysis, and capital gains reporting, make performance monitoring more accessible. Downloadable reports are an added advantage.

8. Reviews and Ratings

User reviews and ratings on parameters like customer service, fees, ease of usage, etc., lend credibility to the platform’s quality of services. Awards and media mentions also validate services.

Summing it Up

Choosing the right mutual fund platform goes a long way in simplifying the investment journey for novice and seasoned investors alike. A platform that scores high on critical parameters like the intuitive interface, transaction ease, dedicated customer support, and robust security enhances the overall investing experience. Invest time in evaluating platforms on these aspects before investing. Now that you know how to select the right platform, it is time to understand the paperwork and the regulatory requirements involved,  more specifically the KYC norms for investing in mutual funds. 

Mutual Fund KYC

What is Mutual Fund KYC?

KYC or “Know Your Customer” refers to the customer identification process undertaken by financial institutions, including mutual funds. It verifies investors' identity and background details to ensure investments made are genuine and prevent illegal activities like money laundering.  

As mandated by SEBI, KYC compliance is compulsory for all mutual fund investments. An investor must complete a one-time KYC registration before investing in any mutual fund scheme. 

The KYC registration can be done offline by submitting physical documents to KYC Registration Agencies (KRAs) appointed by SEBI/AMFI. Nowadays, online KYC for mutual funds has also been facilitated for investors' convenience.

Why is Mutual Fund KYC Compulsory?

1. Prevent Identity Theft: KYC verifies that the investor signing up is genuine by matching PAN details, proof of identity, and address. This prevents fraud by those looking to steal someone's identity to launder money.

2. Monitor Suspicious Transactions: KYC data enables tracking of investor activity to identify any suspicious transactions that may be linked to illegitimate practices. Authorities can take timely action in case of any violations detected. 

3. Maintain Investor Confidentiality: All investor information provided for KYC compliance is confidential. Details are shared only on request by government agencies to prevent money laundering.

4. Standardized Process across Industry: A uniform KYC process sets a reliable standard for verification that applies to all financial institutions and mutual funds for consistent compliance. 

5. Legal Requirement for Funds: Per the PMLA Act and AMFI guidelines, mutual funds must mandatorily ensure all investors go through the KYC process before investing and update records periodically. Non-compliance can lead to penalties.

In summary, a KYC process protects the overall integrity and stability of the mutual fund system by establishing the authenticity of investors beyond doubt through a standardised identification procedure.

The process of Mutual Fund KYC 

Investors can complete one-time KYC registration for mutual fund investments through the following ways:

1. Offline KYC

Herein, the required KYC form and identification documents are physically submitted to a KRA (KYC Registration Agency). The leading agencies registered with AMFI for KYC verification include CVL KRA, CAMS KRA, Karvy KRA and NDML KRA.

• Visit the nearest CSC (Common Service Center) affiliated with any KRA 
• Submit duly filled KYC application form along with self-attested copies of documents for proof of identity (PAN, Aadhar, etc.) and address proof  
• Biometric verification is also conducted to authenticate identity
• KYC acknowledgement letter with a 14-digit unique KYC Identification Number (KIN) received as confirmation 

2. Online KYC  

An easier option is to complete real-time online KYC verification by registering on the website of any KRA that supports the e-KYC process.

• Visit the website and sign up for an account by providing basic personal and contact details
• Select the appropriate KYC form for mutual fund investment 
• Enter details as per the online form and upload soft copies of identity and address proofs
• Video-based identification process carried out 
• On successful verification, online KYC acknowledgement received with KYC Identification Number (KIN)

3. Aadhaar-Based eKYC

Many mutual funds and investment platforms also facilitate a direct Aadhaar-based eKYC process on their portals through an OTP-based authentication system.  

• Fill in the required details in the form along with the Aadhaar number
• Fill in  the OTP received on your registered mobile number to authorise linking Aadhaar with PAN
• Instant eKYC completed based on authenticated Aadhaar data from UIDAI records
• The paperless process concluded in real-time

Thus, online modes relying on Aadhaar's eKYC or KRA’s video-based verification allow mutual fund investors a quick, seamless KYC registration experience.

What are the Documents Required for Mutual Fund KYC?

The mandatory documents required to complete the one-time KYC process are:  

1. PAN Card: PAN number is central for linking and accessing KYC data across institutions a person invests with. 

2. Proof of Identity: Any ONE of the following - Aadhaar, Passport, Voter ID, Driving License or any other ID card with your photo issued by the Central/State government.

3. Proof of Address: Any ONE of the following - Aadhaar, Passport, Voter ID, Driving License, Utility bill, Bank Statement or Rent Agreement showing residence address.

All documents submitted should be self-attested by the investor. The proofs provided at the time of KYC registration should preferably carry the current updated address details.

How to Check Mutual Fund KYC Status?

An investor can check their Mutual Fund KYC status by following these simple steps:

1. Visit www.cvlkra.com, which is the KRA under the CDSL Ventures Limited (CVL) 

2. Click on ‘Check your KYC Status’ and enter details such as PAN, Name, Date of Birth, etc.  

3. Status is displayed as KYC Registered or Not Registered.

4. If registered, investors can view details like KYC ID no. (KIN), date of issuance and expiry to check if any update is needed

5. One can also check their KYC status directly on their mutual fund’s website by providing a folio number or PAN details.  

The real-time KYC status helps ascertain if the investor’s KYC is valid or has expired, wherein they would need to submit the relevant KYC details again to revalidate it. Checking MF KYC standing regularly is advisable.

Types of Mutual Funds

Before moving ahead and looking how to invest in mutual funds, there are a few key things that you must know. These include some basic types of mutual funds and also a few key aspects that can help you make a better decision. 

Direct and Regular Mutual Funds

When browsing through mutual funds for investing, an investor would notice two plans under the same scheme – A direct plan and a Regular plan. The key difference between regular and direct mutual fund plans (with the same portfolio) is the expense ratio each fund charges. The regular fund charges a higher expense ratio. To understand why such a difference occurs, let’s look at both the plans in detail:

What is a Regular Mutual Fund?

• These are mutual fund plans that investors can subscribe to with the assistance of an intermediary like a mutual fund agent, distributor or broker.
• All transactions are routed through these middlemen who facilitate services like recommending schemes, handling paperwork, and handling investments and redemptions on the investor’s behalf.  
• In return for the advisory and transaction support services rendered, distributors charge a commission from the fund house before passing on returns to investors.
• This distributor fee is built into the expense ratio charged to the investor under regular funds and the core management fees.

What is a Direct Mutual Fund? 

• Here, the investor directly invests in the mutual fund without involving intermediaries or distributors. 
• Investments are made directly on the fund house website after selecting schemes independently. 
• Being a do-it-yourself route, no distributor commissions are involved. 
• Hence, direct funds have a lower expense ratio with savings on distributor charges.

For example, If the expense ratio of a regular equity fund is 2.5% p.a., the direct plan of the same fund will charge around 1.5% p.a.

So, should an investor opt for Direct or Regular funds? Here is an overview of the key deciding factors:

Choose Regular Fund Route If:

• Unsure about selecting schemes and need expert guidance. 
• Prefer intermediary to handle documentation and operational aspects.
• Need regular advisory on mutual funds and investment planning based on goals.

Choose Direct Fund Route If:  

• Confident of independently picking funds in line with financial plans. 
• Keen to avoid intermediary fees to save on costs that boost returns.  
• Have access to DIY investment platforms offering direct funds.  

The direct route gives investors more control over portfolio choices made while enjoying lower expense ratios that enhance returns in the long run. However, leveraging an intermediary helps first-time investors unfamiliar with MFs gain requisite knowledge.

‘IDCW' and 'Growth' Option

Under the dividend plans in mutual funds, investors now have to choose between the IDCW (Income Distribution cum Capital Withdrawal) option and the Growth option. Earlier known as Dividend reinvestment and Dividend payout options, respectively, the re-categorization of options introduced by SEBI is more descriptive of their nature.

Let us understand both options:

IDCW Option

Here, a portion of the returns earned from mutual fund investments are periodically paid out to investors by redeeming the applicable number of units from the total portfolio corpus. 

• Provides regular income in the form of IDCW payouts.
• Timing, frequency and quantum of IDCW are left to the fund manager's discretion based on the available distributable surplus.
• IDCW amounts paid out are subject to tax as per the investor's income tax slab.  
• There are two sub-options: Payout of IDCW or Re-investment into more units.

Growth Option

All returns earned remain invested in the mutual fund scheme, allowing the portfolio corpus to grow.

• No IDCW payouts made, complete growth orientation.
• Power of compounding magnified over long-term.
• No tax incidence until units are redeemed.  
• Only option that allows investment corpus to perpetually compound entirely.

Suitability

The Growth option works better for investors who do not seek regular income and focus more on capital appreciation. There is no tax deduction, and neither does allowing entire gains to compound.

The IDCW option works well for investors who want to earn some added regular income or look to redeem units periodically. However, the tax impact on IDCW payouts reduces effective gains.

What Is Your Ownership Claim?

Every investment made into a mutual fund entitles the investor to a specific number of units basis the investment amount and prevailing NAV (net asset value). 

The units allotted represent the proportional share of ownership the investor owns in the mutual fund scheme. Each distinct investment made is assigned a unique folio number that registers one as an unitholder of the fund.

A consolidated account statement reflects all transactions and current holdings across the investor's different folios. This confirms the unit balance and market value of investment in respective schemes.

A few good practices to adopt are:

1. Always add a nominee: Registering a nominee is crucial to ensure the mutual fund units are transferred to their name in case of any eventuality, and heirs can simply claim them by submitting the death certificate and signature attestation of a nominee. Saves hassles involved during succession.  

2. Provide email address and mobile number: Linking email IDs and mobile numbers with mutual fund accounts enables seamless communication and alerts on the portfolio. It also facilitates online transactions via an enabled mechanism for enhanced security.

3. Monitor portfolios periodically: Investors can assess performance and make timely adjustments by keeping tabs on capital invested, current valuation and returns generated at both scheme and portfolio levels.

How To Invest in Mutual Funds on Angel One?

1. Download the Angel One app and open an account. 
2. On the Home page, go to ‘Mutual Funds’.
3. Choose the Mutual Fund that you want to invest in from the various lists provided on the Mutual Fund portal.
4. Choose whether you want to invest via lump sum or SIP mode.
5. Enter the amount that you want to invest.
6. Click on the payment button to complete the payment and start your investment.

Conclusion

Investing in mutual funds requires evaluating key aspects spanning choice of platform, completing KYC, selecting suitable schemes, comparing plans, options holdings, etc. By understanding these intricacies upfront through parameters explained in this guide, investors can have a more informed and less intimidating foray into the vastly rewarding journey of mutual fund investing. Evaluating platforms' user-friendliness, costs, security, and service quality is vital. Seeking expert help when in doubt, being diligent about financial goals and staying invested over the long term are also critical tips for success.

However, this is only half the process. In the next chapter, we’ll learn how to select funds and the factors required for undertaking such a task. So, let’s go on to the next chapter - How to Start Investing in Mutual Funds Part 2.