Mutual Funds
by 5paisa Research Team Last Updated: 2023-02-02T15:45:29+05:30

Introduction to Mutual Funds

For novice investors, buying mutual fund shares might be scary. You may find a wide variety of funds, each with a particular investment strategy and asset allocation. Trading mutual fund shares are distinct from trading stock or ETF shares (ETFs). Mutual fund fees might be difficult to understand. Investment returns in mutual funds are heavily influenced by management fees, so it's critical to know what they are.

How to Invest in Mutual Funds

 

What are Mutual Funds?

An investment business known as a mutual fund combines the money of a large number of investors into a single pot. In addition to stocks, bonds, commodities, and even real estate, the fund's professional management invests the money in a variety of other assets. A mutual fund investor purchases shares of the fund.

Each of these shares represents a stake in a part of the fund's assets. Because of their high transaction costs, mutual funds are intended for long-term investors only. Investors may find mutual funds appealing since they are well-diversified. A well-diversified portfolio reduces the risk of an investment. A single investing vehicle, mutual funds, eliminates the need to investigate and make individual decisions about which assets to include in a portfolio.

There are funds out there with tens of thousands of different investments. A mutual fund's liquidity is another advantage. Mutual fund shares are straightforward to purchase and sell. Mutual funds are available in a broad range of options. A few of the most common kinds of mutual funds are bond, stock, balanced, and index. Fixed-income securities are the primary asset of bond funds. Interest is paid to holders of these bonds on a regular basis.

This interest is distributed to mutual fund shareholders by the mutual fund. Capital-market investment vehicles invest in a wide range of firms' stock as a whole. Investing in stock funds is primarily based on the long-term appreciation of the company's stock, as well as dividends. The entire value of a company's outstanding shares, known as its market capitalisation, is a common investment strategy for stock funds.

Stocks that have market capitalisations of $10 billion or more are known as large-cap stocks. Funds that invest in equities might focus on big, mid, or small-cap companies. There is a tendency for small-cap funds to be more volatile than large-cap funds.

Bonds and equities make up a balanced fund's portfolio. In these funds, the allocation of stocks and bonds varies according to the fund's strategy. It is possible to invest in index funds that follow an index like the S&P 500.

Investing in these funds is done automatically. They have a lot in common with the index that is being monitored. Because of the minimal asset turnover and passive management, these funds have reduced fees. Continue reading to know about how to invest in mutual funds for beginners in India.

 

Things to Consider Before Investing in Mutual Funds for Beginners

1. Set a Goal for Your Investment

Financial objectives, budget, and time horizon all play a major impact in your investing. To get a handle on how much money you can invest, you need the first figure out how much risk you're comfortable with. Investing works best when it is done with a specific goal.

2. Make Sure you Choose the Type of Mutual Fund

Choosing the correct mutual fund category requires more than reading about various fund kinds. First-time investors are often advised to invest in a balanced or debt fund because of its low risk and stable returns.

3. Select a Mutual Fund from a Shortlist

If you're looking to invest, you'll need to analyse and evaluate the many mutual fund options available in each category. Investors should not overlook elements including the fund manager's qualifications, expense ratio, portfolio components, and assets under management while making their investment decisions.

4. Invest in a Variety of Assets

Consider diversifying your portfolio by investing in more than one mutual fund. In order to diversify your investment portfolio, you need to invest in a variety of funds. When one mutual fund underperforms, the other funds make up for the loss, keeping your portfolio's value constant.

5. Instead of Lump-sum Investments, Use SIPs

Systematic investment plans (SIPs) are a good way to get into the stock market if you've never done so before. Spreading your assets over time and investing in many markets is better than making one large investment at the height of the stock market. With SIPs, you have the advantage of rupee cost averaging, which lowers the cost of your investment and increases your long-term profits.

6. KYC Papers Should be Kept Current

If you haven't completed the Know Your Customer (KYC) procedure, you can't invest in a mutual fund. Most financial transactions in India are now subject to the Know Your Customer (KYC) procedure, mandated by the government in an effort to combat the laundering of funds. As part of the KYC process, you must have a valid PAN card and address verification.

7. Enroll for Net Banking

Internet banking is required for all mutual fund purchases. It is possible to invest in mutual funds using debit cards and checks, but net banking is an easier, faster, and safer way to do so.

8. Ask a Financial Counselor for Help

There is a lot of work involved in investing in mutual funds. The performance of the many mutual funds must also be tracked since there are dozens to select from. If you're having trouble deciding on the best mutual funds, consider hiring a mutual fund specialist or distributor.

 

Why to invest in mutual funds?

Mutual funds are investment vehicles managed by investment specialists that will assist you in investing your money in highly profitable possibilities. They explore the market for attractive returns on your investment based on your investment goals.

The following is a summary of some of the reasons why an investor should begin investing in mutual funds:

● Inexpensive: One of the most appealing reasons to invest in a mutual fund is that you may begin with very little money. Mutual funds are worth the risk of establishing a foundation for your long-term investing goals with SIPs as low as 500 Rs each month. Investing in direct plans also saves you money on brokerage and commission costs.

● Expert Management: As we have seen, mutual funds are managed by industry experts. These specialists do research and monitor market movements. They manage your portfolio by picking the right stocks and trading them at the right moment. This is how they achieve profitable results. When purchasing units in a mutual fund scheme, an investor can obtain a professional overview of the fund manager.

● Larger returns: When compared to other low-risk investments, mutual funds produce a substantially higher share of returns. These are not monotonous and may be readily varied based on an investor's risk tolerance.

Simple: Because the KYC procedure is now completed online, investing in mutual funds has become easier, faster, and more efficient. There are several fund firms that now provide online investment options. Investing in a mutual fund scheme is now a one-click affair.

● Disciplined Investing: A Systematic Investment Plan (SIP) in mutual funds establishes an investment habit. An SIP is a terrific method to invest in little sums on a regular basis, with the frequency varying. An investor can set up an auto-debit feature for their SIPs, which will debit a specified amount from the investor's account on a monthly basis.

 

How to invest in mutual funds?

Mutual fund investments can be done directly through the AMC website, either online or offline. The process entails an investor first opening a new account, followed by providing personal information for the investment. The next step is to complete the FATCA form and provide his bank information. He will then be required to provide a photograph of the canceled check. The KYC will be verified by Aadhar, and he will then be needed to send the necessary funds.
An offline investment requires the investor to visit the AMC local office and submit an application, KYC papers, and payment.

You can also choose to invest through your demat account online. If you already have a Demat account, there is no need to make any further effort to invest in a mutual fund. The current Demat and bank accounts can be utilized to invest and trade in the mutual fund in a variety of ways. To invest in a mutual fund using a demat account, an investor simply logs into his Demat account and searches for the option to invest in a mutual fund. The next stage is for him to select an appropriate fund in which to invest. Then he must finish the investment by transferring the needed cash online. 
 

How to Invest in Mutual Funds through SIP

  • Before you may invest in a mutual fund, you must first complete your KYC. You can do it online by filling out the KYC registration form and providing the self-attested identification and address verification.
  • You next go to the fund house's website and choose the mutual fund plan that best suits your needs.
  • You may apply for an account by providing your name, phone number, and PAN number, as well as a username and password.
  • Enter your bank account information and set up the SIP auto-debit amount, and you're done.
  • You may choose a mutual fund plan by logging into your account at the fund house.
  • For monthly SIPs, you must make the first SIP payment online and the second instalment 30 days later. As soon as the AMC has notified you of the date, you'll know.
  • You may continue the SIP for as long as you like. It's up to you to select how long the SIP will last.

 

How to invest in Mutual Funds through Lumpsum Investment

With an asset management provider, you may set up a direct mutual fund investment plan. You have the option of making an investment either in person or online. A self-attested ID and address evidence, together with two passport-sized pictures, must be submitted to the mutual fund institution to complete your KYC.

Using an internet platform, you might invest a large quantity of money in mutual funds. It's as simple as logging on to the mutual fund company and selecting your chosen investment strategy. Investing in a mutual fund as a one-time lump payment is as simple as selecting the One-Time option and entering the desired amount.

 

Tax Strategy

1. Invest in ELSS

Under Section 80C of the Income Tax Act of 1961, ELSS mutual funds allow you to save tax. Annual tax deductions are available for investments of up to $150,000. Although you can invest more, any extra funds will not be deductible.

If the total long-term capital gains amount from equity oriented mutual funds/equity shares in a year exceeds $1,000,000, the profits earned by ELSS funds are subject to a 10% long-term capital gains tax. Dividends are taxable in the hands of the investors if you choose the dividend option, and the mutual fund will deduct TDS @10% for resident investors and @20% (plus relevant surcharge and cess) for non-resident investors before distributions. However, the investor may claim a TDS tax credit.

2. Invest for Long-term

Long-term capital gains tax are levied on equity mutual funds held for more than a year. The long-term capital gains tax (LTCG) on equities mutual funds is 10%. Gains are free from tax up to Rs 1 lakh in a fiscal year. This provision allows you to earn tax-free returns. However, if your long-term capital gains surpass Rs 1 lakh, you must pay taxes on them. If you sell your stock mutual funds before the end of the year, you must pay a 15% short-term capital gains tax.

3. Invest in Debt Funds:

According to government regulations, if an investor sells an asset more than three years after the date of acquisition, the profits qualify as long-term capital gains (LTCG), which are subject to a 20% tax after using the indexation principle. The gains an investor will realize, however, if they sell an asset in less than three years are known as short-term capital gains (STCG). Only LTCG on debt funds are eligible for indexation in mutual funds, which helps investors pay less in taxes while also producing greater returns.
 

Investment Strategies

Following are some of the best investment strategies that you can apply while investing in mutual funds in India:

1. Create a Stable and Diversified Portfolio

Many mutual funds put your hard-earned money into blue-chip firms directly, while others put it into niches like banking, real estate, and other industries.

To provide extra flexibility, certain mutual funds might provide a combination of equity and debt funds based on your needs. In order to obtain worthwhile and lucrative returns, an investor selects the suitable mix and profiles. To develop a robust portfolio, an investor who wants to invest in one or two equity funds must diversify over a number of industries and asset classes.

2. Keep your Investment Goals Clear.

Before making a mutual fund investment, an investor should be clear about their investment goals.Mutual funds are renowned as being adaptable financial solutions, and an investor may start one today with little RS 500.An investor may invest in any mutual fund and redeem their investment at any time, except of ELSS schemes and closed-ended funds. This enables investors to choose the mutual funds they want while keeping in mind their investing goal.

3. Buy-and-Hold Strategy

This is by far the most popular investing approach. This technique entails purchasing investments and holding them over an extended period of time regardless of whether the markets are rising or falling. According to conventional opinion, if you use a buy-and-hold strategy and ride out the market's ups and downs, your gains will balance your losses over time.

4. Invest in Balanced Funds

Balance advantage funds invest in a mix of assets such as stock, debt, and, in certain circumstances, gold. If stock markets fall, the proportion of equity assets in the fund portfolio will fall, and when the fund management rebalances their portfolio, they will shift partially from debt to equity, allowing them to purchase equity investments at cheaper prices.

5. Invest Through SIP

With a SIP, you buy more units when the market is down and less units when the market is up because of rupee cost averaging. As a result, investing through a systematic investment plan (SIP) is the best option during these erratic periods when it is impossible to forecast market tops, bottoms, and directions in the near term.

6. Know The Right Time to Close a Mutual Fund

The decision of when to withdraw from a mutual fund is crucial for an investor. Unfortunately, a number of investors abandon mutual funds when the market enters a negative phase, which is a bad practice and not a recommended plan.The skilled fund managers know how to recover from the negative term and take full benefit of it.
 

Conclusion

Investors need to complete their due diligence before purchasing a mutual fund. Some aspects of this are more convenient, but there are still crucial things to consider before making a purchase. There are several reasons to invest in mutual funds, and a little due research may make all the difference—and create a feeling of security.

 

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