How To Invest In Mutual Funds?

Key Highlights

• Mutual funds pool money from multiple individuals and invest in various securities.

• While investing in mutual funds, assess your risk tolerance and compare historical performance. Moreover, diversify your investments and regularly monitor their performance.

• An investor can do online investing in mutual funds through the official website of an Asset Management Company. You can also invest with third-party mutual fund aggregators.

• Investors can also invest in mutual funds offline. They can obtain the application form AMC and submit it with essential documents. They will receive the mutual fund units after the due payment.

• Mutual funds include the expense ratio and transaction fees. Investors also have to pay exit load and Securities Transaction Tax (STT)

Mutual Fund: Meaning and Types

A mutual fund is a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities managed by a professional fund manager. This allows individual investors to gain exposure to a wide array of assets without needing to select and manage each security independently.

There are five main types of mutual funds:

1. Equity funds: These invest primarily in stocks and aim for capital appreciation.

2. Debt funds: These focus on fixed-income securities like bonds and aim for stable returns.

3. Hybrid funds: These invest in a mix of equities and fixed-income securities, balancing risk and return.

4. Index funds: These track a specific market index, such as the Nifty 50, and aim to replicate its performance.

5. Sector funds: These focus on specific sectors, like technology or healthcare, providing targeted exposure.

Process of Investing in Mutual Funds

You should follow this procedure to invest in a mutual fund.

• Step 1: First, assess your risk tolerance. This is crucial to select the right mutual fund to invest in.

• Step 2: The next step is asset allocation. Allocate funds to different asset classes. Include both debt and equity instruments in your portfolio to balance the risk.

• Step 3: Compare mutual funds by analysing their performance in the past.

• Step 4: Choose a mutual fund plan to invest in based on your preferences.

• Step 5: For better returns, diversify your investments and monitor the performance of funds. Adjust your portfolio whenever it is necessary.

Importance of Completing the KYC Process before Investing in Mutual Funds

The KYC (Know Your Customer) process is a critical step in mutual funds investment. It helps in verifying the identity and address of the investor, ensuring compliance with regulatory requirements. Completing the KYC process offers several benefits:

Enhanced security: It helps prevent fraudulent activities and ensures the security of your investment.

Regulatory compliance: Adhering to KYC norms ensures that you comply with the regulations set by financial authorities.

Smooth transactions: After completing the KYC, you will find that future transactions become hassle-free and quick.

How to Invest in Mutual Funds Online

Online mutual fund investing is easy. Here are the steps to invest in mutual funds online.

1. Choose the Official Website of an AMC

There are several mutual funds on the official websites of all asset management companies (AMCs). Fill out all the necessary information and submit it by following the directions on the website.

Complete the KYC procedure online (e-KYC) using your Aadhar number and PAN. The AMC verifies the information and you can begin investing after successful verification.

2. Using an App

AMCs make it simple and quick for investors to purchase mutual funds using mobile applications. Third-party mutual fund aggregators also offer platforms for investing in mutual funds. The apps facilitate investors to purchase and sell units. They can also get account statements and check their portfolio. Using these apps, investors can invest in a variety of mutual funds from numerous fund firms.

Offline Mode of Investing in Mutual Funds

Investors can also invest in mutual funds offline. Here are the steps to invest in mutual funds offline:

• Step 1: Choose an asset management company.

Select the AMC that you want to invest through. Research various mutual fund houses and pick a suitable one.

• Step 2: Get the application form.

To find the application form, get in touch with the AMC or go to its website. You may also get it from a financial mutual funds distributor.

• Step 3: Fill out the application form properly

Provide your personal information, the amount of investment, and other details correctly. Make sure all the details are accurate.

• Step 4: Submit the application to the AMC

Once the application is complete, submit it to the AMC. Provide a copy of your PAN card or other essential documents as well.

• Step 5: Make the due payment

Finally, pay the due amount using a demand draft or a check. You will receive the confirmation shortly after. You may also receive an email or an account statement.

How to Invest in Mutual Funds for Tax Benefits

Investing in mutual funds can also have tax benefits. One of the most popular options for tax-saving is the Equity Linked Savings Scheme (ELSS). ELSS funds come with a lock-in period of three years and offer tax deductions under Section 80C of the Income Tax Act. Understanding how to invest in mutual funds specifically for tax benefits can help you optimise your tax liability while growing your wealth.

Investing in Mutual Funds through Different Modes

When it comes to how to start investing in mutual funds, investors can choose between two primary modes: lumpsum and Systematic Investment Plan (SIP).

Lumpsum investment: This involves investing a large amount of money in one go. It is suitable for investors with substantial funds and those looking to capitalise on market opportunities. Lumpsum investments can result in significant gains if the market performs well, but they also carry higher risk.

SIP (Systematic Investment Plan): An SIP allows investors to invest a fixed amount at regular intervals, typically monthly. It is ideal for those with limited funds and a long-term investment horizon. SIPs offer the benefit of rupee cost averaging, reducing the impact of market volatility, and instilling financial discipline.

Costs Involved in Mutual Funds Investing

You will incur the following costs while investing in mutual funds.

1. Expense Ratio: The percentage of average assets under management that AMCs spend on these costs is the expense ratio. For instance, AMCs have administration, distribution, and other costs.

2. Transaction Fee/One-Time Charge: Investors may have to pay a small amount as transaction fees. This usually varies with different AMCs.

3. Output Load: An exit load is applicable when an investor withdrawal funds. It is expressed as a percentage of the current Net Asset Value (NAV) of the plan.

4. Securities Transaction Tax (STT): A Securities Transaction Tax is imposed when an investor chooses to sell mutual fund units.

Factors to Consider Before Investing in Mutual Funds

When choosing a mutual fund, you should consider the following factors.

1. Investment Objective:

Having clear objectives helps you to choose the right fund according to them. So, you must determine your goal first. It may be buying a new home, vehicle, wedding, child's education, retirement, or anything else. Knowing the investment objective will help you understand the amount of wealth and time required to achieve it.

2. Select Funds Appropriately:

It might be difficult to choose the right mutual funds because there are so many options available on the market. Thus, it is vital to conduct an in-depth study. Consider your investment goal, risk tolerance, and affordability when evaluating the fund you choose. If you want, you may also get assistance from an expert.

3. Examine the Risk Elements:

You must also keep in mind the risks associated with mutual funds. High-return funds usually have higher risks. If you want large returns and have a high tolerance for risk, you should consider equity plans. Debt plans, on the other hand, are good if you prefer low-risk with modest returns.

4. Maintain Updating Your KYC Documents:

If one does not comply with Know Your Customer (KYC), he cannot invest in mutual funds. So, investors must adhere to KYC regulations. You'll need your PAN card, identity, and address proof to update your KYC status.

5. Tax Implications:

Consider the tax implications of your mutual fund investments, especially if you are investing for tax-saving purposes. Equity and debt mutual funds are taxed differently. Likewise, as mentioned before, ELSS funds are the only category of mutual funds to offer tax benefits under Section 80C.

Conclusion

Today, investing in mutual funds has become easier. You can directly invest with the asset management companies or can visit their website and invest in the mutual funds such AMCs offer. In addition, third-party platforms also facilitate investing in mutual funds. You can invest in several funds of different AMCs on such platforms. Alternatively, you may also invest in mutual funds offline. You can reach out to the AMC and get the application form to buy mutual funds units. So, you can choose the method which is convenient for you. However, ensure you research properly before investing in any fund. Choose the funds that match your risk profile and goals.