How to invest in mutual funds
For most investors, mutual funds are a great way to build a diversified portfolio without any additional cost or hassle. There are usually thousands, but hundreds of different stocks, bonds, and other securities that give you instant diversification.
To invest in mutual funds, you need to know how to invest in mutual funds. In this article, we have explained the different ways to start investing in mutual funds online in India. Mutual funds are one of the best investment options as it offers a wide range of options that have the potential to meet every investor’s need, irrespective of their financial investment objectives or risk appetite.
This article helps you understand the different types of mutual funds available in India and the different ways in which you can invest. Here, you can know why you should choose mutual funds for your investments and how to invest in mutual funds.
How to invest in mutual funds?
Before you decide to invest in mutual funds, it is important to keep the following things in mind. Doing so will help you choose the right type of funds to invest in and help you accumulate wealth over time.
Identify your purpose for investing:
This is the first step towards investing in mutual funds. You need to define your investment goals that can happen – buying a home, child’s education, marriage, retirement, etc. If you don’t have a specific goal, you should at least be clear about how much assets you want to accumulate and how much time it has. Identifying an investment objective helps the investor to consider investment options based on the level of risk, payment method, lock-in period, etc.
Customer KYC requirements:
Investors have to follow KYC guidelines to invest in mutual funds. For this, the investor has to submit copies of permanent account number (PAN) card, proof of residence, age proof etc. specified by the fund house.
Know about the available schemes:
The mutual fund market is full of options. There are schemes to suit almost every need of the investor. Before investing, make sure you do your homework by exploring the market to understand the different types of schemes available. After doing so, align it with your investment objective, your risk-taking ability, your affordability and see what suits you best. If you are not sure which scheme to invest in, seek the help of a financial advisor. In the end, it’s your money. You need to make sure that it is used to get maximum returns.
Consider the risk factors:
Remember that investing in mutual funds comes with a set of risks. Schemes that offer high returns are often accompanied by high risk. If you have more risk appetite and want to get higher returns, you can invest in equity schemes. On the other hand, if you don’t want to risk your investments and are okay with moderate returns, you can go for debt schemes.
After identifying your investment objectives, fulfilling KYC requirements and figuring out various schemes, you can start investing in mutual funds. A bank account is also a must while investing mutual funds. Most mutual fund houses will ask for a physical or online copy of the bank’s IFSC (Indian Financial System Code) and MICR (Magnetic Ink Character Recognition) cancelled cheque leaf.
Types of Mutual Funds
The types of mutual funds are broadly classified – based on the investment objective, structure and nature of the schemes. When classified according to the purpose of investment, mutual funds can be of 7 types – equity or growth funds, fixed income funds or debt funds, tax saving funds, money market or liquid funds, balanced funds, gilt funds and exchange traded funds (ETF).
Depending on the structure, mutual funds can be of 2 types – close-ended and open-ended schemes. When mutual funds are classified based on nature, they can be of 3 types – equity, debt and balanced. There is an overlap in the classification of some schemes like equity growth funds which may fall under classification based on the purpose of the investment as well as the nature.
We have mentioned about some types of mutual funds below:
Growth or Equity Scheme:
These funds invest in equity stocks and the purpose of the investment is capital gains in the medium or long term. They are associated with high risk as they are associated with highly volatile stock markets but in the long term, they offer good returns. Therefore, investors with a high appetite for risk consider these schemes as an ideal investment option. Growth funds can be further classified into diversified, sector and index funds.
Also known as fixed income funds, they invest in fixed income or debt securities such as debentures, corporate bonds, commercial paper, government securities and various money market instruments. For those who want regular, stable and risk-free income, debt funds can be an ideal option. Gilt funds, liquid funds, short term plans, income funds and MIP are subcategories of debt funds.
These funds invest in a mix of debt instruments and equity stocks. Investors can expect regular income and growth at the same time with these funds. They offer a good investment option for investors who are willing to take moderate risk for the medium or long term.
Tax Saving Funds:
Anyone who wants to save tax as well as increase their capital can opt for tax saving schemes. Investors can enjoy tax exemption under Section 80C of the Income Tax Act, 1961 through tax saving funds, also known as equity-linked savings schemes.
Exchange-Traded Funds (ETF):
An ETF trades on the stock exchange and owns a basket of assets such as bonds, gold bars, oil futures, foreign currency, etc. It provides flexibility to buy and sell units throughout the day on stock exchanges.
In an open-ended scheme, units are continuously bought and sold and, therefore, allow investors to enter and exit as per their convenience. The fund is bought and sold at net asset value (NAV).
In this type of scheme, unit capital is fixed and only a specific number of units can be sold. Units in a closed-ended scheme cannot be purchased by the investor after the New Fund Offer (NFO) is passed, which means they cannot exit the scheme before the end of the term.
How to buy mutual funds from AMC (Direct Plan)
Investing in mutual funds can be done directly online and offline by visiting the AMC’s website. This process involves the following steps;
i. Open a new account account
ii. Provide personal details for the investment
iii. Fill out the FATCA form
iv. Provide bank details
v. Upload the image of the cancelled check
vi. Verify KYC through Aadhaar and transfer money
Offline investment can be made by visiting the AMC local office and submitting an application, KYC documents and making payments.
How to buy mutual funds from investment platforms (regular plan)
You can invest in mutual funds in a hassle-free manner using online investment platforms. The platform is a single account access that helps you invest, track and manage all your mutual fund investments with various AMC.
The steps required to invest using an online investment platform are;
i. Create an account with an investment platform
ii. Choose scheme or plan
iii. Choose payment type (SIP or lump sum) and amount
iv. Fill in some personal details such as PAN and bank details
v. Transfer money online to complete the investment
How to invest in mutual funds through demat account
If you already have a demat account then you don’t need to put in extra effort to invest in mutual funds. Your existing demat account and bank account can be used for investments and transactions in mutual funds.
To invest in mutual funds through demat account, you need to log in to your demat account and look for options to invest in mutual funds. In the next step, you have to choose the fund in which you want to invest. Then you have to complete the investment by transferring the amount online.
How to buy mutual funds through an agent
This method is not recommended as it is an expensive and time-consuming way to invest in mutual funds. For information only, how to invest through an agent;
i. Call your agent who should be a mutual fund distributor
ii. Submit a copy of all KYC documents and the filled application form along with the cancellation cheque.
Different ways to invest in mutual funds
Once you understand your risk preference and finalize the schemes where you want to invest your money, it is important to understand the different ways of investing in mutual funds. In their endeavour to simplify and facilitate investment, fund houses offer various modes of investing such as:
1. Single investment or lump sum investment
2. Systematic Investment Plan or SIP
3. Systematic Transfer Plan or STP
4. Dividend Transfer Plan or DTP
5. Systematic Withdrawal Plan or SWP
These schemes are designed to help you find the most appropriate investment method for your income and investment goals. Let’s look at each of them in detail:
Single investment or lump sum investment:
Let’s say you’ve managed to accumulate a fund and are now looking for ways to invest and earn returns. Or you are a working professional and you have been given a good bonus this year and want to invest it instead of spending it on a wasted vacation or an expensive gadget.
You start looking at investment options and see that mutual funds offer a variety of schemes to choose from. So you analyze your risk preference, define your investment objective and start assessing individual schemes.
Once you have finalised the kind of schemes you want to invest in, you are faced with the question of whether you want to invest the entire amount together or not.
A lump sum investment has its advantages and disadvantages. While this creates the possibility of higher returns if your purchase time is right, it can also put your investment at high risk (if your timing is wrong).
To hedge against this, it is important for lump sum investors to have a long time horizon of investing and invest in schemes that have a stable record.
Systematic Investment Plan or SIP:
This option is perfect for people with a regular monthly income – the majority of our country’s population – working class. If you don’t have any savings but want to start creating wealth for your future expenses, SIP is a boon for you. If you choose the SIP mode of investing in mutual funds then you can start saving from as little as ₹500 per month.
It works similar to a recurring deposit where you deposit a fixed amount every month that gets added to your cumulative capital and earn compound interest. In SIP mode of investment, units are purchased based on the NAV (Net Asset Value) of the scheme on the day of installment deposit.
This helps you benefit from the average cost of rupees as your funds are invested at different levels of the market in the same scheme. So when the markets are high, the number of units purchased is less than when the market is low.
Systematic Transfer Plan or STP:
If you have a corpus of funds, but you don’t want to invest outright nor as an SIP, then a Systematic Transfer Plan (STP) is built just for you!
An STP can help you invest slowly in equities by initially investing your funds in a low-risk option and systematically transferring funds from the same fund house to a higher return scheme (such as equity).
They use the benefits of SIP by exposing your funds to low-risk funds and transferring small amounts to high-return schemes without any additional risk. It is the best of both worlds and if used wisely, it can help you meet your financial objectives.
Dividend Transfer Plan or DTP:
Most investors are aware of dividend reinvestment plans (DRIP), where they no longer receive dividend payments, but the amount is reinvested in the scheme that generated dividends. Dividend Transfer Plan (DTP) works similarly to DRIP but with a small change in structure.
In a DTP, dividends can be reinvested in a scheme from a different asset class than a dividend generating scheme. So, if you have received dividend income from a loan scheme, you can ‘transfer’ it to an equity scheme and vice versa.
This works well for low-risk investors who have invested in debt funds. They can choose to transfer their dividends to an equity fund and create the possibility of earning higher returns without putting their capital at any risk.
Systematic Withdrawal Plan or SWP:
As the name suggests, this is more of a withdrawal method than an investment mode, but we thought it deserved a mention because investing is all about managing your future needs and expenses.
Let’s say – you work to save money throughout your life and invest it carefully to create a fund. At the time of retirement, you receive payment as per the scheme and have a good corpus in your bank account. But, you are not so good at managing expenses and spending on unnecessary things. So this highlights the possibility of your entire fund being exhausted soon and there is no savings/savings in old age. Explains the possibility of being left without investment. It’s definitely not a pleasant idea.
A systematic withdrawal plan (SWP) steps in here and ensures that you lead a financially healthy life after retirement and will never run out of money. Through this scheme, you can pay monthly/monthly pension to meet your regular expenses. You decide in advance how much amount you want to withdraw quarterly. The remaining investment continues to earn returns for the long run of your fund.
Costs associated with investing in mutual funds
The fund value is calculated according to the net asset value (NAV), which is the total expense of the fund’s portfolio. It is calculated by the AMC after each trading day.
The AMC will charge you an administrative fee, which includes their salary, brokerage, advertising and other administrative expenses. This is usually measured using the expense ratio. The lower the expense ratio, the lower the cost of investing in that mutual fund.
AMC can also charge loads, which are basically sales fees incurred by the company as delivery costs.
If you are unfamiliar with associated charges, you may come across a situation where the benefits from your investment are significantly reduced due to overhead expenses. Therefore, it is a good habit to read fine print for details of expenses and fees related to mutual funds.
Why should you invest in mutual funds
As stated above, mutual funds are professionally managed investment vehicles that will add to your money in the long term. Mutual funds can invest in a variety of instruments such as equity, debt, money market, etc. and get favorable returns on your investment. There are many more reasons for you to invest in mutual funds and we have chosen the top reasons for you below:
Mutual funds are managed by professional fund managers who conduct research and monitor the markets, identify right stocks, and buy and sell them at the appropriate time to get a favorable return on your investment. Fund managers also analyze the performance of firms before deciding to invest in their stocks. Also, when you buy a unit of a mutual fund scheme, the Scheme Information Document (SID) will contain a professional summary of the fund manager which includes years of work experience, type of fund managed and performance of the fund. Managed by him. So, you can rest assured that your money is in the right hands.
Compared to fixed deposits like fixed deposits (FD), recurring deposits (RD), etc., mutual funds offer better returns on your investments by investing in different types of instruments. Equity mutual funds offer an excellent opportunity for investors to enjoy high returns but at the same time have high risk and, therefore, are ideal for high risk investors. On the other hand, debt funds offer less risk and get better returns than fixed deposits.
Perhaps one of the biggest benefits of mutual funds is diversification. By investing in a wide range of asset classes and stocks, mutual funds reduce risk by diversifying the portfolio. So, even if one asset/stock is not performing well, the performance of other assets can balance it out and you can still enjoy a favorable return on your investment. To further reduce the risk, you can diversify your portfolio by investing in different types of mutual funds. If you are not sure about which funds to invest in and how to diversify or balance your portfolio, seek the help of a financial advisor.
Investing in mutual funds has been made quick, hassle-free and simple by several fund houses that facilitate online investments. By just clicking a few buttons, you can start investing in the mutual fund scheme of your choice. Even the KYC process can now be done online and investors can invest up to Rs 50,000 using the e-KYC facility. However, for investments above Rs 50,000, investors are required to complete the physical KYC process.
You can start investing in mutual funds for as little as Rs 5,000 (lump sum) and Rs 500 monthly SIP (Systematic Investment Plan). Therefore, you do not have to wait for a large amount to accumulate to start investing. Also, if you invest in a direct plan of a mutual fund scheme, you do not have to pay any additional commission to distributors or agents.
To develop the habit of regular investing, mutual funds offer a facility known as systematic investment plan (SIP). A SIP allows investors to invest small amounts on a regular basis, the frequency of which can be weekly, monthly or quarterly. An auto-debit facility can be set up for your SIP where a certain amount will be automatically debited from your bank account every month. A SIP provides a great way to invest regularly and every time without having to invest manually.
Now that you have learnt about the benefits of investing in mutual funds and how to invest in them, start investing and see if your wealth grows.
Frequently Asked Questions on Investing in Mutual Funds
What is the regulatory body for mutual funds?
The Securities Exchange Board of India (SEBI) is the regulatory body for all mutual funds mentioned above. All mutual funds must be registered with SEBI. The only exception is UTI, as it is a corporation constituted under a separate Act of Parliament.
What are the risks involved in investing in mutual funds?
A very significant risk involved in mutual fund investments is market risk. When the market is in a bearish state, most equity funds will also experience a bearish. However, due to professional fund management, the company’s specific risks are largely eliminated.
On what parameters should a mutual fund scheme be evaluated?
Performance indicators such as total returns given by the fund on various schemes, returns on competing funds, objective of the fund and promoter image are some of the key factors that should be considered while making investment decisions with respect to mutual funds.
What are the different types of schemes offered by any mutual fund scheme?
It depends on the strategy of the scheme concerned. But generally there are 3 broad categories. The dividend scheme involves regular payment of dividends to investors. Reinvestment scheme is a scheme where these dividends are reinvested in the scheme itself. A growth scheme is one where no dividend is declared and the investor gains only through capital increase in the NAV of the fund.
How can one track the performance of a mutual fund scheme?
The performance of a scheme is reflected in its Net Asset Value (NAV) which is disclosed on a daily basis in case of open-ended schemes and on a weekly basis in case of closed-ended schemes. The NAV of mutual funds is required to be published in newspapers. NAV mutual funds are also available on their websites. All mutual funds have to put their NAV on the Association of Mutual Funds in India (AMFI) website www.amfiindia.com and thus investors can view the NAV of all mutual funds in one place.
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