Investing in mutual funds is a straightforward process that begins with setting clear financial goals, such as saving for retirement, a child’s education, or a major purchase. Once your goals are defined, you need to understand the different types of mutual funds available, including equity funds, bond funds, balanced funds, index funds, and sector funds, each catering to different risk tolerances and investment strategies.
You can invest in mutual funds by submitting a completed application form with a check or bank draft at the designated branches or Investor Service Centers (ISC) of the mutual fund transfer agent or fund registrar. Also, you can choose to invest online through respective mutual fund websites. In addition, it can be invested with the help of a financial intermediary, i.e. a mutual fund distributor registered with AMFI, OR chooses to invest directly.
What is a Mutual Fund?
It is an investment tool in which many investors come together and pool their funds. This accumulated money is then invested by the fund manager in various asset classes, including stocks, bonds, gold and other securities, to generate returns. The profits and losses from these investments are distributed among the investors based on the share of the investment.
How to start investing in Mutual Fund?
- Start by creating your risk profile, that is, understand your risk tolerance and your ability to take it. It is essential to know the level of risk that one can take before investing in mutual funds.
- Once the risk profile is determined, the next step is asset allocation, where you need to spread your money across different asset classes. Asset allocation should include a mix of equity and debt instruments to balance risk factors.
- The third step is to identify the funds that invest in each asset class. Then you can check past performance or investment goals to compare mutual funds.
- Choose and decide which mutual fund scheme to invest in. Then you can launch the application online or offline.
- Diversifying your investments and regular monitoring are essential to ensure better results and higher returns.
Ways to invest
SIP (Systematic Investment Plan)
SIP allows you to invest a fixed amount at regular intervals. SIP is one of the most recommended ways to invest in mutual funds as it is convenient. It also helps to average the cost at which you buy shares of these funds.
Lumpsum
When you make a single investment, it is called a package. Lump sum investments are usually made when people receive a large amount of money, such as a bonus or payments from the sale of an asset.
Mutual Funds you should invest in
- Types of mutual funds based on asset class
- Mutual funds in India are classified into different categories based on the asset class in which they invest. Here are some popular categories.
- Equity mutual funds
- Equity funds invest most of their assets in stocks. These funds are classified into different categories based on the market capitalization of the stocks in which they invest.
- Large capital funds
- These funds invest at least 80% of their assets in the top 100 companies by market capitalization. Mid-cap funds
- These funds invest at least 65% of their assets in the next 150 companies (from 101 to 250) ranked by market capitalization.
- Small capital funds
- These funds invest at least 65% of their assets in companies ranked 251 and higher by market capitalization.
- Multi-cap funds
- These funds invest at least 25% of their assets in each of large-cap, mid-cap and small-cap stocks.
- Debt mutual funds
- Bond funds generate returns by lending to businesses and governments by buying their debt securities. These funds are classified into different categories according to the duration of the loan and the credit quality of the securities.
- Hybrid funds
- Hybrid funds invest in a combination of asset classes, including stocks, bonds or gold. There are several categories of hybrid funds depending on the part they distribute between different asset classes.
How to invest in Mutual Funds online?
It is essential to understand how to open a mutual account online. Investing in mutual funds online can be quite simple and can be done in two ways:
Creating an account on an official website (AMC website)
- Each asset management company has an official website where you can find several mutual funds in each category to invest. You must follow the instructions given on the official website of the fund company, fill in all the necessary information and send it.
- The KYC process can also be done online (e-KYC), for which only Aadhar number and PAN are required. The information you provide is verified in the background and you can start investing after successful verification.
With an App
Asset management companies enable investors to invest in mutual funds through mobile applications quickly and seamlessly. AMCs have mobile apps and third-party mutual fund aggregators provide a platform to invest in mutual funds.
The app allows the investor to invest in mutual fund schemes, view account statements, buy or sell shares and check other relevant details about their portfolio. Also, investors can invest in different funds offered by different fund companies.
Types of cost included in Mutual Funds
Here are some of the costs that may be incurred when investing in mutual funds:
- Charge fee
- The expense ratio is the percentage of average assets under management that is dedicated to expenses incurred by asset management companies (AMC). For example, the AMC will face administrative costs, fund management, distribution, etc. to manage their business.
- One time fee / transaction fee
- Investors may have to pay a nominal amount as a transaction fee. For investments below Rs 10,000, there are no transaction charges. This may vary depending on the AMC.
- Exit tax
- Exit fees are charged when an investor withdraws money quickly. They are set as a percentage of the net present asset value (NAV) of the plan.
- STT
- When an investor decides to sell shares of mutual funds, a securities transaction tax (STT) is imposed.
- Stamp duties
- Stamp duty is applicable on issue and transfer of mutual funds irrespective of whether the units are held in dematerialized or physical form. Stamp duty is a direct tax imposed by the government.