Have you ever thought of making more money other than your Savings in your Bank Account? Also you want some sort of guidance or someone who will professionally manage your money and provide you good returns. Now such amounts which provides you additional income other than your regular savings are called Investments.
Mutual Funds are companies who does this work for you. Mutual fund Company is a trust that collects money from the investors who share a common investment objective and invests the same in equities, bonds, money instruments, and other securities. The income gained from this collective investment is distributed proportionately amongst the investors after deducting all expenses by calculating the schemes Net Asset Value.
Mutual Funds are ideal for those investors who not have large amount of investments and also do not have time to do a proper market research. The money collected by the mutual fund company is invested by the professional fund managers in line with the scheme’s stated objectives. The fund house charges a small fee which is deducted from the investment. The fees charged are regulated and are subject to certain limits specified by Securities and Exchange Board of India.
India is one of the countries where savings rate is high. Indian investors have moved out of traditional culture where investments meant only Fixed Deposits and Saving Bank Accounts. But still many people are unaware about the mutual fund and its investment schemes.
Let’s understand How to Invest in Mutual Funds
Investing in Mutual funds involves one of the easiest investment processes making these investments flexible, transparent and reliable for the investors. One can invest in mutual funds in either of the following ways
- Offline Mode
- Online Mode
As we are in the digital world, most of them prefer to invest online mode only as it is fast and simple process. However those who wish to opt for offline Mode can follow the following steps
- Choose any institutions like An Asset Management Company, A bank, A karvy/CAMS office, Mutual Fund distributor/Agent
- Submit the KYC, Getting Your KYC done is mandatory for all first time mutual fund investors. Investors needs to provide an identity proof, An Address Proof, Pan Card and Passport Size Photograph.
- Complete the in-Person Verification as mandated by capital markets regulator SEBI.
- Select a mutual fund scheme on the basis of your investment time horizon, risk appetite, availability of funds and other important factors.
- Submit the mutual fund application form. This should be done after the completion of the IPV which usually takes 5-7 days. Along with the application form, you should also submit the investment amount.
- This is the mode which is most commonly used and things get done faster compared to offline Mode. The following steps are to be followed for online mode
- Visit the website of any of the following
- An Asset Management Company
- A registered investment adviser
- A mutual fund distributor
- Complete the e-KYC form available on the concerned authority’s website. You will be required to digitally submit the self-attested copies of the following documents along with the KYC form
- An identity proof
- PAN card
- An address proof
- A passport-sized photograph
- Complete the in-Person Verification as mandated by capital market regulator, SEBI
- Select a mutual fund scheme on the basis of your investment horizon, risk appetite, availability of funds and other important factors.
- Submit the mutual fund application form. This can be done after the completion of the IPV which usually takes 5-7 days.
How To Invest In Mutual Funds using Mobile Application
To invest through a mobile application, you must-
- Begin with downloading the application via App Store/Play Store on your smartphone
- Log in to the application by creating an account
- Get your KYC done
- Once you are done with the logging in and registering yourself on the application, you can check the available funds and track their performance
- After choosing the fund, you can start investing
Things to be considered to Invest in Mutual Funds
- Risk Appetite
For example if someone cannot take risk with your investments, it would be better to invest in debt mutual funds as they involve lesser risk. On the other hand, if you have a higher risk appetite, equity mutual funds should be your choice
- Investment Horizon
If someone is investing for your own retirement, you should invest in long term equity funds that generate higher returns in the long term.
- Save On Tax Payments
If your purpose of investment is to save on your tax payments, you may choose to invest in mutual funds such as ELSS that will help you save up to Rs.1.5 Lakh per year under Section 80C of the Income Tax Act.
It is important to note that you must check the fund’s last 3 to 5 year trailing returns, its NAV and AUM in order to get an idea of the number of investors of the given fund. It is important to ensure that the fund has maintained consistency over a long period of time.
How Do Mutual Funds Work?
- Mutual Fund work by pooling money together from the investors. These money is used to purchase stocks, bonds, securities. Mutual Fund investment provides diversification to investors. Mutual Fund investors share in the funds profits and losses.
- The type of securities selected for the portfolio is in accordance with the investment objectives as disclosed in offer document. Therefore, an equity mutual fund scheme will invest predominantly in a portfolio of stocks, while a debt fund will invest a significant portion of its assets in bonds. Within the asset class itself, the investment objective can be further narrowed down.
- Thus, within the broader equity mutual fund category, there can be Large-cap Funds, Mid-cap Funds, etc., that are focused on a specific market capitalization of stocks. Based on the investment style, there can be Value Funds or Focused Equity Funds as well.
- A fund manager manages the investments in a mutual fund. There can be more than one fund manager, based on the discretion of the AMC. The fund manager manages the fund on a day-to-day basis, deciding when to buy and sell investments according to the investment objectives of the fund.
- The mutual fund collects money from you and other investors and allots units. This is similar to buying shares of a company. Under mutual funds, the price of each fund unit is known as the Net Asset Value.
- The assets are invested in a set of stocks or bonds that form the portfolio of the fund. The fund manager, depending on the investment objective of the scheme, decides the portfolio allocation.
Cost Involved in Mutual Funds
The management of your funds makes you liable to pay certain expenses explained as below-
- Expense Ratio– Expense ratio is a fee that an investor is charged for the professional management of his/her funds. It is calculated as the percentage of the assets payable to the fund manager.
- Entry Load– This fee is charged when you invest in a mutual fund scheme. Entry load was deducted from a fund’s NAV and was generally fixed at around 2.25% of the investment value. Since 2009, SEBI has abolished the entry load on mutual fund investments.
- Exit Load– Exit load is a fee charged when an investor leaves or redeems his investment in a mutual fund scheme. An investor is liable to pay exit load if he/she redeems his funds before a specified time period. Exit Load is charged in order to discourage the investors to withdraw their funds, thereby reducing the number of withdrawals from the scheme.
- Indirect charges– Investors might have to incur a number of indirect expenses during the tenure of his/her investment. These expenses include costs related to maintaining the account, brokerage, Security Transaction Tax, etc.
Mutual funds allow investors to reap inflation-beating returns with the help of a diversified portfolio of stocks and/or bonds. Mutual Funds allow investors to start investing with an amount as low as Rs. 500, along with the facility of professional management of funds. No wonder Mutual Funds have become one of the most popular investment instruments today.