How to Invest in Mutual Funds
Overview of Mutual Funds and Why They are Appealing
Mutual funds are investment companies that collect the savings of many different investors and put the gathered money towards buying stocks or bonds. The main aim is to profit from the price differences. Although mutual funds can be invested in stocks, bonds or a combination of these two, there’s a fund manager who manages the day-to-day operations of the fund and is responsible for take up a decision of which bonds or stocks to purchase. In a nutshell, you get to buy a slice of the fund’s diversified portfolio that has been put together by the fund manager.
Mutual funds make for attractive investments because most ordinary investors do not have the time, knowledge, or resources to research and follow the stock market, which is a crucial element in any investment strategy. Mutual funds help you profit from the stock market without having to become a stock market expert.
Reasons Why Mutual Fund Investment in India Has Seen Such a Boom
How to Invest in Mutual Funds for Beginners in India
If you are a beginner and want to know how to invest in mutual funds, here is what you need to do. The first order of business is to complete your Know Your Customer (KYC) formalities. Every investor who wants to get their money in the mutual fund space needs to complete KYC, a simple procedure that verifies your identity for the sake of combating financial fraud and market manipulation. You will most likely only need to show your PAN and address proof and a video verification; everything is done in a matter of minutes online.
Once KYC is done, set realistic investment goals. If you are trying to save money for your home down payment in five years, for your child’s education in fifteen years, or as an emergency fund, each scenario reflects a different time horizon and thus requires a different investment approach.
Next, you need to learn the language of mutual funds. To put it simply, equity funds are the ones that mainly invest in stocks and are therefore suitable for long-term investment needs, while debt funds invest in debentures, bonds, etc., and are safer but offer lower returns. Hybrid funds, as the name suggests, are a combination of equity and debt funds. With this basic information, you can avoid making any rookie mistakes that could cost you dearly.
Decide whether you want to make lump sum or Systematic Investment Plan (SIP) investments. A SIP is simply investing small, fixed amounts at specified intervals, usually monthly. It is a much safer and more accessible option for beginners, especially those who earn the majority of their income from their salary. With respect to lump sum, you can invest a relatively large amount of money in a single go. Once this is decided, you can go ahead and choose which fund(s) to invest in.
Remember that you do not have to invest big amounts at once. Even small SIPs can deliver substantial returns when given enough time.
How to Choose the Best Mutual Funds to Invest In
This is the part where most first-time investors get confused because there are just way too many mutual funds available for them to choose from. There are a few factors you need to consider when selecting the best mutual funds to invest in. First, select funds based on the objective and time horizon, not the other way around. Next, evaluate the past performance of the fund in different market cycles across the past few years on the basis of their past performance indicative of future returns. Look at the risk and reward ratio; a lower expense ratio is desirable because it means the fund’s performance is not being eaten away by unnecessary expenses.
Next, research the experience and reputation of the fund manager and how long they have been managing the fund under review, and finally, consult the riskometer to get an idea of the type of risks involved with the fund.
Direct vs Regular Mutual Fund Investment: Which is Better?
There is a lot to consider when it comes to deciding between direct and regular mutual funds, but you should know that this decision is much easier to make than you think. A regular mutual fund is bought from a distributor, an intermediary whose job is to sell mutual funds to investors. Meanwhile, a direct mutual fund is purchased directly from the company that issues the fund, with no intermediary involved. Because there are no intermediaries with direct plans, their expense ratio is usually lower than that of regular plans of the same scheme.
That lower expense ratio can have long-term implications for your investment returns because of the power of compounding, which is why direct plans are typically more desirable, especially for experienced investors. However, regular plans usually come with a complimentary financial adviser who can guide you through the process, which is often helpful for first-time investors. There is no right or wrong answer when it comes to choosing between direct and regular plans; it comes down to your particular situation. If you are capable of navigating the mutual fund waters on your own, a direct plan will most likely be better for you.
How to Invest in Mutual Funds Online
Investing in mutual funds through the digital medium is super simple. You can invest directly through the website or application of the fund house you choose or use an online investment platform to make the transaction. Some banks also offer online fund investment through their own net-banking services. The process is ot register, complete the KYC process, link your bank account, choose your preferred scheme, and invest. If you choose to complete these steps through an investment platform, you will also have the option to view your portfolio or redeem/switch your mutual fund investments with just a few clicks of a button, which is definitely convenient.
It is a good idea to explore multiple platforms before selecting the one you want to work with based on the services offered, ease of navigation, quality of customer support, and whether or not the platform offers direct plans in case you are considering them.
A Word on Risk and Realistic Expectations
Building a Well-Rounded Portfolio
Final Thoughts
Team LenDenClub
LenDenClub is India’s largest peer to peer lending platform which started operations in India in 2015. We have been helping lenders diversify their portfolio beyond traditional investment instruments ever since.