For first-time investors, mutual fund investments may seem complicated as it can be confusing at times. Understanding how mutual funds work is the first step in your investment journey.
You can invest as low as Rs 500 or 1K in mutual funds through SIPs, which may not be possible with most other investment options. There are many mutual funds available, and you can invest in funds whose investment objectives and risk levels are consistent with your risk profile.
How do Mutual Funds Works -
A mutual fund is created when an asset management company (AMC) collects investments from different individuals and institutional investors with common investment objectives. A fund manager professionally manages the investments deposited by strategic investment in securities to generate maximum returns for investors in line with the fund's investment objectives.
A fund manager is a professional with an excellent track record of managing investments and a deep understanding of the markets। Fund houses charge an expense ratio, which is the annual fee to manage a mutual fund.
Investors earn money through regular dividend / interest and capital increase. They can either opt for reinvestment of capital gains through growth option or earn steady income through dividend option. To understand the most used terms in the mutual fund industry, click here.
Why should Invest in Stock Market -
- Convenience
Investing in mutual funds is a paperless and straightforward process. Investors can monitor the market and invest according to their needs. Also, switching between mutual fund schemes and portfolio rebalancing helps in keeping returns as expected.
- Low initial investment
You can create a diversified mutual fund portfolio by investing a minimum of Rs 500 per month through SIPs in mutual fund schemes of your choice. You also have the option to invest in the form of a lump sum or systematic investment plan (SIP). However, when a lump sum investment is compared, an SIP is able to reduce the overall cost of investment while the compounding highlights the power of profit.
- Saving of tax
You get a tax deduction of up to Rs 1.5 lakh per financial year under Section 80C of the IT Act for specific financial instruments, and tax-saving mutual funds are one of them. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for Indians over the past few years, due to its high returns and the shortest lock-in period of three years out of all Section 80C options.
- Professional Fund Management
Your mutual fund investment is managed by a professional fund manager, supported by a team of researchers. The fund manager devises an investment strategy for your asset allocation। The team of researchers selects the appropriate securities according to the investment objectives of the fund.
What Thinks to consider as a First time Investor -
- Set an investment target
Defining your financial goals, budget and time frame plays an important role in your investment. This will help you decide how much you can set aside for your investment and you should also invest based on your risk profile। Investing with a purpose always works best.
- Choose the right fund type
It takes more time to decide on the right category than reading about different mutual fund types. Experts usually recommend a balanced or debt fund for first-time investors as it comes with minimal risk while offering stable returns.
- Shortlist and choose a mutual fund
With a lot of mutual fund schemes in each category, you need to analyse and compare them to pick the right investment. Investors should not ignore factors like the fund manager's credentials, expense ratio, portfolio components and asset under management.
- Diversify your portfolio
Consider investing in more than one mutual fund to diversify your portfolio and earn risk-adjusted returns. A portfolio of funds will help you diversify across asset classes and investment styles. It will also eliminate the risks when a mutual fund performs poorly, as other funds compensate for the loss while maintaining the value of your portfolio. Read here to know more about the portfolio creation.
- Go for an SIP instead of a lump sum investment
For the first time, investors are advised to invest in equity instruments through a systematic investment plan (SIP). While a lump sum investment can put you at risk of reaching the pinnacle of the stock market, SIPs allow you to expand your investments over time and invest at the market level. The average cost benefit of the rupee with SIPs also helps you average your investment cost and earn high returns in the long run.
- Keep KYC documents updated
If you have not completed the Know Your Customer (KYC) process, you cannot invest in mutual funds. KYC is a government regulation to identify the source of funds for most financial transactions in India and to prevent money laundering. To become KYC-compliant, you need a PAN card and a valid address proof. ClearTax helps you out there.
- Open a net banking account
To invest in a mutual fund, you need to activate internet banking in your bank account. Mutual funds also allow investment through debit cards and cheques, but doing it through net banking is a much simpler, faster and safer process to invest.
- Consult a financial advisor
The entire process of investing in mutual funds can be tedious and heavier। With thousands of mutual funds to choose from, the performance of the fund will also have to be monitored. If you find it difficult to pick the right mutual fund, seek the services of a mutual fund expert or distributor.
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