How to Invest in Mutual Fund?

Mutual fund schemes tend to be formed when an AMC or asset management company pools in investment from diverse institutional and individual investors who have common investment goals. A fund manager is subsequently responsible for managing these discerning pooled investments in a strategic manner by choosing to invest in capital assets with the aim of generating maximum returns for the discerning investors.

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Such fund managers essentially are expert professionals belonging to the domain of finance and tend to have quite a good understanding of the various markets.  

The different fund houses charge an expense ratio that involves the annual maintenance fees involved in managing the investments. The investors subsequently make money on mutual funds through capital gains and regular dividends or the internet. They may either opt to reinvest in the capital gains with the help of a growth option or choose to earn a steady income through the dividend option.

Advantages of Investing in Mutual Fund

The following are the key advantages to make an investment in mutual fund schemes:

Convenience: Understanding how to invest in a mutual fund is not too difficult. In fact, the procedure to do so is quite straightforward and simple. As an investor, you simply have to monitor the market, select the ideal mutual fund schemes, and ultimately invest in them by following certain simple steps.

Low Initial Investment: You need not have a huge bank balance to invest in mutual funds. In fact, you get the benefit of having a diversified mutual fund portfolio simply by making an investment as low as INR 500 on a monthly basis. In the case of mutual funds, you have the choice to either make your investment as a systematic investment plan (SIP) or as a lump sum.  Conversely, in comparison to a lump sum investment, SIPs are more capable of bringing down the investment expenses, while enabling you to enjoy the benefits of compounding.

Tax-Saving: According to Section 80C of the Income Tax Act of India, tax deductions are made applicable on particular financial instruments. Mutual funds are one of such instruments. ELSS or Equity Linked Savings Scheme has especially emerged as a popular investment vehicle for tax savings over the years in India due to its superior returns, as well as short lock-in period.

Professional Fund Management: When it comes to mutual fund investments, as an investor, your money shall be managed by a particular fund manager, who is backed by a professional team of financial experts and researchers. Such fund managers generally formulate the investment strategy for the relevant asset allocation, and they tend to have real-time access to the financial environment on whose basis they might adjust your mutual fund portfolio.

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Types of Mutual Funds

Mutual funds are of several types, among which you have to choose the perfect variants to put your money in. This choice should be made on the basis of your investment goals, risk appetite, investment timeline, prevailing market situations and so on.

Broadly speaking, mutual funds tend to be classified on the basis of:

  • Investment objective
  • Structure
  • Nature of the schemes

In the scenario that the mutual fund schemes are classified as per their objectives, they can be put under seven categories, which are

  • Growth or Equity funds
  • Debt or fixed-income funds
  • Tax saving funds
  • Liquid or money market funds
  • Balanced funds
  • Gilt funds
  • Exchange-traded funds (ETFs)

When it comes to the structure of mutual funds, they can be of two types, which are

  • Close-ended schemes
  • Open-ended schemes

If the classification of mutual funds is made on the basis of their nature, these schemes can be categorized under three types, which are

  • Equity funds
  • Balanced funds
  • Debt funds

There additionally is an overlap when it comes to the classification of certain schemes.

Expenses Associated with Mutual Fund Investments

Prior to getting started with the process of making mutual fund investments, you must first try and understand the expenses involved in it. Firstly, you must know that the mutual fund valuations are calculated in accordance with the NAV or Net Asset Value. NAV is the value of the portfolio net of expenses of the fund and is calculated subsequent to every business day by the AMC.

The AMC shall charge the investors with particular administration fees, which essentially includes their brokerage, salaries, advertising, and various other administrative charges. An expense ratio is ideally used to measure this amount. The lower an expense ratio is, the lower shall be the cost of making the relevant mutual fund investment.

Asset management companies may even charge loads from the investors, which are a type of sales expense incurred by the company in the form of distribution charges. In case you are not properly aware of such associated expenses, then there is a high chance that you end up in a position where the profits made from your investments gets significantly reduced owning to overhead charges. Hence, it is important that you go through the fine print thoroughly before making an investment, especially when it comes to the fees and expenses involved in a mutual fund scheme.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Factors to Consider when Investing in Mutual Funds

Before learning how to invest in a mutual fund, you should firstly dwell on the pointers mentioned below and keep them in mind. These points can significantly help you to identify the ideal funds to invest in, as well as ensure that you are able to invest in the portfolio of your choice without any hassle.

  • Determine Investment Purpose: Prior to anything, you must be clear about why you want to invest in mutual funds. No matter whether your ultimate aim is to buy a house, set up an education fund for your children, or save for your retirement, you should be clear about your financial goals. In case you do not have a clear goal in mind, you at least should have a general idea about the amount of wealth you plan to accumulate and within what time period. Determining an investment purpose can help you to choose the ideal mutual fund options, on the basis of the lock-in period, payment method, risk and so on.
  • Gain Knowledge about Available Schemes: The options available in the market when it comes to mutual funds are extensive. You can find a wide range of schemes to suit the needs of almost any type of investor. Hence, prior to making any investment, you should try to properly do your homework by choosing to explore the market and gain an understanding of the various types of schemes.
  • Select the Perfect Fund Type: It takes a lot more than simply reading about various types of mutual funds to identify the ideal one that aligns with your personal investment objectives and risk appetite. In case you are a first-time investor, then it shall be a smarter choice for you to invest in a debt or balanced fund, which comes with lesser risks while providing greater returns.
  • Shortlist the Options and Make a Choice: Subsequent to choosing the ideal fund type, you must shortlist schemes offered by renowned companies under it. This list must be created as per your affordability, the portfolio components of the fund, as well as its expense ratio. After doing so, you should compare all the schemes in the list thoroughly, to come to the ideal conclusion.  
  • Complete your KYC needs: To invest in mutual funds, you shall have to comply with the needed Know Your Customer (KYC) guidelines.  For this purpose, you shall be required to submit copies of your PAN (Permanent Account Number) card, age proof, proof of residence, and so on, as specified by the relevant fund house.
  • Open a net banking account: For the purpose of investing in mutual funds, it would be a prudent move to activate the internet banking facility on your bank account.  Even though you do have the choice to make mutual fund investment through cheque or debit card, doing so through the process of net banking is much simpler and straightforward.

Subsequent to completing the steps mentioned above, you would be ready to invest in mutual funds. You can even ask assistance from an expert adviser when trying to learn how to invest in mutual fund most efficiently, as well as to seek guidance on diversifying your portfolio. As an investor, you should ideally try to put your money in more than one mutual fund, with the aim of having a dynamic range of investment instruments. This shall considerably aid you to even out risks. As a result, even when one fund underperforms, you can be assured that the other one might make up the losses without lowering the worth of your whole portfolio.  

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

How to Invest in Mutual Funds?

After going through all the pointers needed to be considered when investing in mutual funds, you would have to understand exactly how to invest in a mutual fund. There essentially are several ways to do so, both online and offline. You may either choose to invest in mutual funds directly with the AMC or asset management company with the help of a direct plan. For this, you shall have to complete your KYC at a KRA or a KYC Registration Agency by filling up the KYC registration form online and uploading certain important documents after self-attesting them. This includes identity proof like a PAN card and address proof like a voter ID card. In certain situations, you may have to go for an In-Person Verification (IPV) as well.  In addition to this, you can also invest in mutual funds by physically visiting the fund house and completing all the formalities at their branch itself or carry out this process with the help of intermediaries like mutual fund distributors or brokers.

The following points provide a better insight on how to invest in a mutual fund:

  • Making Offline Investment with the Fund House Directly: You may opt to invest in a certain mutual fund scheme by choosing to visit the nearest branch office of the relevant fund house. While doing so, you must be mindful of carrying a copy and originals of a Proof of Identity and a Proof of Address. Along with these, you must also carry a passport size photograph of yourself, along with a cancelled cheque. The fund house shall give you an application form that you would be required to fill in and submit with the important documentation mentioned.
  • Making an Offline Investment with the Help of a Broker: A mutual fund broker is basically an individual who can help you to get through this whole investment process. They shall provide you with the needed information that aids you to make a smart investment, including the features of diverse policy schemes, important documents involved and so on. For all the assistance provided, the broker shall charge a fee that generally is deducted from the total investment sum.
  • Making an Online Investment through the Website: Today, the majority of fund houses provide an online facility for making mutual fund investment. To make your investment through this process, you simply have to visit the official website of the fund house, follow the instructions provided there, fill out the information required and ultimately make your submission. The entire KYC process can also be completed online, for which you ideally have to enter your PAN and Aadhar card number. All the information provided shall be verified at the backend, and once it is done you can easily start investing online. The process of investing in mutual funds online is extremely simple and hassle-free and hence is chosen by most investors today.
  • Making an Online Investment through Mobile Application: A number of fund houses today enable their investors to make their investments through a mobile app. These applications enable the investors to buy or sell mutual fund units, check out their account statements, and video other important details concerning their folio. There also are certain applications available that allow you to both invest and access details of your investment from several fund houses on a single platform.

By following any of the processes mentioned above, you can effectively invest in mutual fund schemes of your choice.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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