Investing in mutual funds can be one of the best financial decisions. But you must know how to invest in mutual funds. There are several through which you can choose to invest in mutual funds. This post discusses how to invest in mutual funds through the 4 best ways along with the various types of mutual funds, their benefits and how to choose the right mutual fund to reach your financial goal. Read on!
A mutual fund is a financial product where an Asset Management Company (AMCs) pools together money from many investors. Then these AMCs use the collected money to invest in stocks, bonds, and other money market and debt instruments. This allows an individual to invest in a large, diversified, and professionally managed basket of securities at affordable costs.
Mutual funds invest in a massive number of stocks, debts, or other assets. Most individuals do not have enough money to invest in these financial products by themselves. By investing in mutual funds, investors access a wide range of investment options that let them reduce their risks or get higher returns.
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In a mutual fund, AMCs pool together investments from both individual and large investors with common financial goals. A fund manager then uses the pooled funds to strategically invest in various securities according to a financial goal. The fund manager is a professional investment expert with an excellent public track record of managing investments.
Each investor owns a certain number of units that represent a portion of the total holdings of a fund. When the fund generates returns through capital appreciation or interests, he/she gains money in proportion to the investments. The AMC charges a certain expense ratio to manage the mutual fund and deducts it from investors’ profits.
The investor can choose either the growth or dividend option to invest in mutual funds online. The former will allow him/her to reinvest his/her capital gains, while the latter will earn a steady income.
We have listed all the various ways of how to invest in mutual funds in India.
1. Directly through an AMC
You can invest in a direct mutual fund through the respective AMC. You will need to complete your KYC online at a KYC Registration Agency (KRA) by filling the registration form and uploading a self-attested ID, address proof, and scanned photograph. A representative (of the AMC) will contact you at your residence to complete the verification process.
2. Through the official website
Fund houses allow you to directly invest in their mutual funds from their own websites. Simply log on to AMC’s website, choose the appropriate funds and follow the instructions provided. After you submit the relevant details and fill in the e-KYC, you can start investing.
3. Through various apps
There are many popular online brokerage apps such as KFintech, Paytm Money, Groww, Orowealth, etc., offering a range of mutual funds from different AMCs. You can download one of these on your mobile device and use them to buy/sell units, view account statements, or get details about your portfolio. Invest in Navi Nifty 50 Index Fund via any of these platforms with ease.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
4. Offline mode
You can use the help of a mutual fund broker to make your investment process easier. He/she will provide you guidance with choosing funds, documents for filing, and help you with withdrawals, etc., for a fee.
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To start investing in mutual funds, follow these steps:
Step 1: Register
Visit the desired fund website and provide your name and other details to register yourself. If your KYC (Know Your Customer) is not done, you may need to complete your KYC. If you are KYC compliant, you just need to enter your PAN card number for verification.
Step 2: Enter Personal Details
Enter your personal details like income, profession, nationality and if you pay tax in another country. Agree to terms and conditions to move to the next step.
Step 3: Enter Nominee Details
Enter the Nominee details such as name, date of birth, etc. along with the percentage of allocation. Skip this step if you do not wish to add a nominee.
Step 4: Enter Bank Details
Enter bank account number, IFSC code and type of account. Investment and points redemption will take place in this bank account.
Step 5: Enter Investment Details
Step 6: Pay the Amount
Choose online or offline payment options. For online payment, check the final confirmation box. For auto-debit through net banking, you will receive a SIP Registration Reference Number that you must provide to your bank.
Broadly speaking, there are two types of mutual funds:
In this type of mutual fund, investors cannot buy the units in the scheme after the New Fund Offer (NFO) is passed. This means that investors cannot exit the scheme before the maturity period.
In open-ended schemes, investors can continuously buy or sell mutual fund units as per the NAV. Thus, investors are free to enter and exit the scheme whenever they please.
That said, based on the risk, returns, investment objectives, and asset allocation, mutual funds are of the following types:
These invest primarily in shares of various companies with the objective of wealth creation or capital appreciation. Equity funds have the potential to deliver greater returns but carry higher risks. They are best for long-term investments.
Debt funds invest in fixed income or debt securities such as government bonds, bank certificates of deposit, corporate bonds, debentures and various money market instruments. Risk-averse investors choose these mutual funds due to their low risks and high liquidity.
This type of mutual fund invests in both equities and debts, offering a balance between risks and returns. These are ideal for those investors who are looking for moderate risks with regular income and some capital appreciation.
This type of mutual fund replicates the performance of an underlying benchmark index, such as Sensex, Nifty 50, and more. Index funds their investment corpus (pool of funds) to the same stocks that constitute the benchmark. Note that the allocation percentage is also the same.
By drawing from a large pool of investments, mutual funds provide a lot of advantages not easily available for most investors. These benefits are:
This refers to mixing a range of investments within a portfolio. Mutual funds reduce the market risk for investments by allocating the investment corpus to different asset classes and securities (stocks, bonds, etc.).
Mutual funds are managed and maintained by professional fund managers with a public history of diligently managing funds. These highly trained managers know how to formulate the perfect investment strategy after conducting rigorous market research.
Low barrier to entry
Mutual funds have very low entry prices. With Systematic Investment Plan (SIP), investors can build their portfolio with as low as Rs. 500 per month.
With certain tax-saving funds (such as the ELSS), investors can get tax deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
Investing in mutual funds is an easy and straightforward process. You can easily invest in the mutual fund of your choice through any of the above-mentioned methods.
There are several costs associated with investing in mutual funds:
Mutual funds offer investors easy access to a range of assets, including equities, bonds, and money market instruments. It provides a less risky alternative to stock market investments and better returns compared to fixed deposits. Individuals can easily invest in a fund of their choice keeping in mind their investment objective and risk appetite.
Ans: To invest in mutual funds, you do not need to have a Demat account. You can choose to invest through AMCs, apps, online websites, etc.
Ans: You can start investing in mutual funds through SIPs at as low as Rs. 500 per month.
Ans: Depending on their type, mutual funds can have high, moderate, or low risks. Equity-oriented funds carry high risks as their performance reflects market performance. On the other hand, debt-oriented funds carry low risks as they invest in debt securities. However, they can still carry some interest risks as their returns depend on the current interest rate regime.
Ans: The right mutual fund for your financial needs will depend on various factors such as your risk tolerance, investment goals, how long you are willing to invest, and such. For example, if you want to take moderate risks for decent returns, hybrid funds could be an option worth considering.
Ans: Yes. Capital gains from mutual funds have taxes applicable to them. Depending on the number of years you hold the mutual fund units, either long-term capital gains (LTCG) or short-term capital gains (STCG) taxes are applicable.
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