Understand how to invest in Mutual Funds - Complete guide on Mutual Funds investments

  • Posted By : reliancesmartmoney.com
  • Saturday Feb 23, 2019

There are many different types of mutual funds available in the market. Each type of fund is explicitly designed to achieve a specific financial objective.

Many advertisements talk about mutual funds being the correct choice for investments. But the question now is, which is the correct mutual fund for investments of the many mutual fund investment options available in the market.

" Ab Kaunsa Mutual Fund aapke liye Sahi Hai, ye aap khud decide kar sakte hai with reliancesmartmoney.com "

How do Mutual Funds work?

A mutual fund is an investment vehicle that pools the fund from investors by their investment objectives and invests them in a variety of capital market instruments like equity shares, bonds, short-term money market instruments, and other securities or assets. The combined holding of equity shares, debentures, and other assets the fund owns are known as investment portfolio managed by the fund manager appointed by the Asset Management Company (AMC).

Simply put, it is a financial intermediary set up to professionally manages the pooled money from investors with investment objectives. For that, the fund houses charge investors an annual fee aka expense ratio - To manage portfolios on their behalf.

Why should you invest in Mutual Funds?

Financial markets have always been complex and sophisticated. In order to be successful, it is important to have a financial intermediary that can provide proper knowledge and professional expertise. The mutual fund is one such financial intermediary that can benefit investors in achieving personal financial goals.

Here are the major advantages of investing in mutual funds:

  • MANAGED BY PROFESSIONALS

    The mutual funds are managed by highly skilled fund managers who are experts with sound knowledge of the market and have extensive experience in making smart investment decisions based on research and expertise. As most novice investors do not possess the sufficient knowledge of the market and time to carry out a proper research, the fund managers do this for living and consistently track all variables to reduce risks and maximized returns for investors.

  • PORTFOLIO DIVERSIFICATION

    One significant benefit of investing in mutual funds is that it provides a built-in diversification that isn’t available in other investment vehicles. A balanced and diversified portfolio can help in disperse market-related risks by spreading pooled money across various assets such as equity, debt, and other financial securities. When you’re investing in equity mutual fund, the same can spread across various sectors to reduce overall risk.

  • LIQUIDITY

    Mutual funds have very high liquidity enabling investors to make withdrawal anytime in future. If the investor decides to redeem it, the fund funds will be credited back to the investor’s bank account. However, it is only applicable to open-ended mutual funds and does not apply to close-ended mutual funds.

  • HIGHER RETURNS

    The primary goal of many investors to invest is to achieve a higher rate of return on investments to beat inflation and achieve future financial goals. As mutual funds provide built-in diversification, mutual funds have more potential of providing comparative higher returns without putting a lot of efforts.

  • TAX BENEFITS

    In mutual funds, the investors can enjoy tax exemption of up to Rs. 1,50,000 under Section 80C, Income Tax Act, 1961. Equity Linked Savings Scheme is one type of open-ended mutual fund scheme that provides tax exemptions of Rs. 1,50,000 under Section 80C. However, the ELSS fund has a lock-in period of 3-years.

  • TRANSPARENCY & FLEXIBILITY

    Investors can have complete access to the periodical information on the value of the investment in addition to the disclosure of the investments made by the scheme. Apart from this, the investors are aware of the proportion of the pooled money within each asset class.

Apart from this, mutual funds allow investors to switch from one to another. They can switch from growth to income funds and vice-versa, and switch from capital gains to income, in accordance with investment objectives.

Things to consider before you invest in Mutual Funds

Investing in mutual funds is considered to be one of the best ways to build wealth in the long-term. Though investing in mutual funds is quite simple, there are still few things to consider before you start your investing journey.

Here are the few important things that you need to know:

  • SET YOUR GOALS

    Before you do anything, sit down, relax and take a good look at your current financial situation – especially if you’ve never made a financial plan before. It is just because the first step to successful investing is to figure out your goals. Layout your plan, whether it is short-term to buy a new car or long-term to build a corpus for retirement, you must plan out your expenses, check on your risk tolerance and set your financial goals before making any financial decision.

  • DECIDE ON MUTUAL FUND TYPE

    After deciding your goal for the investment, decide the type of mutual fund that you wish to invest in. Your reason for investment can help you decide on your investment type.

Let's take a look at some popular mutual fund investment options

Type of mutual funds

Description

Debt Funds

They invest primarily in fixed income securities like government securities, corporate bonds, debentures and other money market instruments. They offer returns on a regular basis. This is an ideal choice if you are risk-averse and seeking a steady income

Equity funds

They invest a significant portion of the money in stocks. Its primary objective is to increase your capital growth at a quick rate. These funds are good for you if you are interested in long-term growth.

Index funds

These funds try to mimic the performance of popular stock market indices like BSE Sensex or the Nifty 100. This is done by investing in the same pattern as these indices. Returns on these funds are highly co-related to the index the fund has benchmarked itself against.

Balanced funds

They offer you the benefit of diversification. They invest in a mix of equities and fixed income securities. This can be a suitable option if you are seeking exposure to both stocks and bonds. These are also called hybrid funds.

Sectoral funds

They invest specifically in a particular sector or industry in the market. For example, some funds invest only in the pharmaceutical sector or the IT sector.

Define your goal for investment. Basis your goal shortlist the type of Fund that you wish to invest in. Your reason of investment can help you decide on your investment type.
You can then compare the various funds available to decide on one or many funds that you would like to invest basis on your risk taking ability, amount you wish to invest, if you want to do a lumpsum or go for a SIP.
The platform will further assist you to choose the fund of your choice by giving you the option to compare various features of the fund, analyse the returns offered by the fund in the past and any other information that you wish to understand before shortlisting the fund.

Review the Mutual Fund schemes

With hundreds of mutual funds schemes available out there, you need the one that can align with your financial objective and in line with your risk profile. Decide whether you want to go with a Systematic Investment Plan (SIP) or Lump Sum. Also, do not forget to check the other factors like fund manager’s background, past performance of MF scheme, asset under management (AUM), expense ratio, Net Asset Value (NAV), etc.

Also, it is important to check the investment allocation. You need to know the proportion of the pooled money – whether it is invested only in equity, debt, or both. Make sure the asset allocation aligned with your financial objectives.

How to invest in Mutual Funds?

1) Become KYC compliant

Every investor needs to fulfil the Know Your Customer (KYC) compliance requirements to start investing in mutual funds. For this, you can download the KYC form. Most fund houses provide the form on their website. Fill in all the details and submit the form along with the necessary documents to registered transfer agents or the AMC of your choice. The documents include:

  • PAN card
  • Photographs
  • Proof of identity
  • Proof of address

2) Start investing in mutual funds

Once you are KYC compliant, you can start investing in mutual funds. Open an account with reliancesmartmoney.com - an all-in-one investment platform; simply enter your bank account details for the transaction of funds and select the scheme you wish to invest. You can create a SIP and choose any date for the monthly SIP based on your convenience. ‘Investment’ is a golden word and in this time and age, it’s an essential technique to achieve financial success.

Related Articles

Load More

Invest in our products customised for your needs.