how to invest in mutual funds

  1. Know your risk tolerance and capacity. Risk profiling is the process of determining how much risk you are capable of taking.
  2. Allocating assets is the next step. After identifying your risk profile, it is important to allocate your money among various asset classes. To balance out the risks of your asset allocation, you should have a mix of debt and equity instruments.
  3. Once you have identified the asset classes, you should invest in them. Mutual funds can be compared based on investment objectives and performance.
  4. Select the mutual fund schemes you want to invest in and make the application either online or offline.
  5. It is important to diversify your investments and follow up on them to ensure that you get the most out of them.

how to invest in mutual funds

Types of Mutual Funds

There are three types of mutual funds – investment objectives, structure, and nature of the schemes. A mutual fund can be classified into 7 types, depending on its investment objective: equity or growth funds, fixed income funds or debt funds, tax-saving funds, money market or liquid funds, balanced funds, gilt funds, and exchange-traded funds (ETFs).

Mutual funds can be classified into two types based on their structure – closed-end and open-ended. Based on their nature, mutual funds can be classified into three categories: equity, debt, and balanced. Equity growth funds, for example, can fall under both classifications based on investment objective and classification based on nature.

The following types of mutual funds are explained:

The investment objective of growth or equity funds is to obtain capital gains over the medium or long term. Investing in these products will carry a high level of risk because they are linked to highly volatile stock markets, but they will provide good returns over the long term. Due to their high-risk appetite, these schemes are ideal investments for investors who are high-risk takers. In addition to diversified funds, sector funds, and index funds can also be classified as growth funds.

Funds that invest in debt securities, also known as fixed-income funds, include debentures, corporate bonds, commercial papers, government securities, and various money market instruments. Debt funds may be the best option for those seeking a regular income that is steady and risk-free. Debt funds are divided into five subcategories: gold funds, liquid funds, short-term plans, income funds, and mutual funds.

A balanced fund invests in a combination of debt instruments and equity shares. In addition to receiving a regular income, investors can also enjoy growth with these funds. Investing in them may be a good choice for investors who are prepared to accept moderate risks.

Investing in tax-saving schemes is an opportunity for anyone who wants to grow their capital and save taxes at the same time. A tax saving fund also referred to as an equity-linked savings scheme can offer tax benefits under Section 80C of the Income Tax Act, 1961.

ETFs are traded on a stock exchange and invest in a variety of assets, such as bonds, gold bars, oil futures, foreign currency, etc. Stock exchanges allow users to purchase and sell units throughout the day.

An open-ended scheme allows investors to enter and exit according to their convenience because units are continuously bought and sold. Funds are purchased and sold at their Net Asset Value (NAV).

Schemes with a fixed unit capital and a limited number of units are called close-ended schemes. A close-ended scheme cannot be bought by the investor after the New Fund Offer (NFO) has passed, therefore, investors cannot exit the scheme before the end of the term.

Costs associated with investing in Mutual Funds

Net Asset Value (NAV) is a measure of the value of the fund’s portfolio after expenses are deducted. The AMC calculates it every day.

You will be charged an administration fee, which covers their salaries, brokerage services, advertising, and other administrative costs. An expense ratio is usually used to calculate the fee. Investing in a Mutual Fund with a lower expense ratio will reduce your investment costs.

In addition to charges, AMCs may also charge loads, which are essentially distribution fees.

Associated charges can reduce your investment profits considerably if you are not aware of them. It’s smart to read the fine print for details on the expenses and fees associated with a mutual fund.


How to Invest in Mutual Funds in Detail

Before you choose to invest in a mutual fund, it is important to keep these points in mind. In doing so, you will be able to choose the right type of funds to invest in and accumulate wealth.

  1. Identify your purpose for investing-The first step towards investing in a mutual fund is to identify your purpose. Investing for investments such as a house, child’s education, wedding, retirement, etc. is important. At the very least, you should know how much wealth you wish to accumulate and in how long you wish to accumulate it. Investment objectives help investors narrow down their options based on factors such as risk level, payment method, lock-in period, etc.
  2. Fulfill the Know Your Customer (KYC) requirements-Investors must follow KYC guidelines to invest in mutual funds. The investor must provide the fund house with a copy of his or her Permanent Account Number (PAN), Proof of Residence, Age Proof, etc.
  3. Know about the schemes available-There are a lot of options available in the mutual fund market. A scheme is available to meet almost every need of an investor. Make sure you have explored the market to understand the different types of investment schemes before investing. Then align it with your investment objective, risk appetite, and affordability to determine what will work best for you. If you aren’t sure about what scheme to invest in, talk to a financial advisor. It is ultimately your money. Ensure you are making the most of it.
  4. Consider the risk factors -It is important to remember the risks associated with mutual funds. Generally, high-risk investment plans offer high returns. In inequity schemes, you can achieve high returns if you are willing to take on a lot of risks. For those who do not want to risk their investment but are okay with moderate returns, debt schemes are an option.

To invest in mutual funds, you must identify your investment objectives, fulfill KYC requirements, and explore the various schemes. Making a mutual fund investment also requires a bank account. A canceled cheque leaf bearing the IFSC (Indian Financial System Code) and MICR (Magnetic Ink Character Recognition) of the bank is usually required by most mutual fund houses.

Ways to Invest in Mutual Funds

Investing in mutual funds can be done in various ways. Here are some examples:

  1. Direct investment with the fund house via the internet

    If you are interested in investing in mutual fund schemes, you should visit the fund house’s nearest branch office. Take a copy of the following documents:

      • Address proof
      • Identity proof
      • A canceled cheque leaf
      • A passport-sized photo
      • An application form, as well as the necessary documents, is provided by the fund house.


  2. Offline investment through a broker

    A mutual fund broker or distributor will help you through the whole investment process. Including details about various schemes, documents required, etc., he will give you all the information you need to make your investment. He will also provide guidance on which schemes to invest in. You will be charged a fee which will be deducted from the total investment.

  3. Online through the official website

    Most fund houses these days offer the option of investing online. Following the instructions on the fund house’s official website, fill out the necessary information, and submit it is all that’s needed. It is also possible to complete KYC online (e-KYC), in which case a PAN and Aadhar number need to be entered. Information will be verified at the backend, and once the verification is complete, you can start investing. Most investors prefer to invest in mutual funds online because it’s quick, easy, and hassle-free.

  4. Through an app

    Investing in fund houses can often be done through a mobile application downloaded onto your device. Using the app, investors can invest in mutual fund schemes, buy or sell units, view account statements, and check other details regarding their folios. SBI Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund, Aditya Birla SunLife Mutual Funds, and HDFC Mutual Funds are some of the funds that allow investments through an app. A few apps give investors access to the details of investments made at multiple fund houses from one platform, such as cams and Karvy.

Investing in mutual funds: why is it a good idea?

Investment vehicles such as mutual funds will compound your money over the long term because they are professionally managed. A mutual fund can invest in several instruments, such as equity, debt, money market, etc., and provide positive returns on your investment. Investing in mutual funds has more advantages than disadvantages, and below we’ve outlined the top ones for you:

  1. Management in the professional environment

    Mutual funds are managed by professionals who track and research the markets, identify the right stocks and buy and sell them at the right time to earn a good return on your investment. In addition to analyzing the performance of firms, fund managers decide what stocks to invest in based on their performance. Additionally, when you purchase units of a mutual fund scheme, the scheme information document (SID) contains the professional summary of the fund manager which includes the number of years he/she has worked and the kind of funds he/she manages. As a result, you can rest assured your money will be handled correctly.

  2. Higher returns

    Compared to term deposits such as Fixed Deposits (FDs), Recurring Deposits (RDs), etc., mutual funds offer better returns on your investments by investing in a variety of instruments. Equity mutual funds present an excellent opportunity for investors to enjoy higher returns but at the same time are accompanied by high risks and hence, are ideal for investors with a high-risk appetite. Debt funds, on the other hand, offer lower risk and fetch better returns than term deposits.

  3. Diversification

    A mutual fund’s greatest benefit may be its diversification. Diversifying their portfolios with a range of stocks and asset classes reduces risk. In this scenario, even if one asset/stock is not performing well, you can still benefit from favorable returns on your investment if the performance of other assets balances it out. In addition to diversifying your portfolio, you may want to invest in different types of mutual funds to reduce the risk even further. If you are unsure which funds to invest in, how to diversify your portfolio or how to balance it, seek the advice of a financial advisor.

  4. Convenience

    With online mutual fund investing, many fund houses have made it easy, quick, and hassle-free for investors to invest in mutual funds. You can invest in a mutual fund scheme of your choice by clicking a few buttons. Using the electronic KYC facility, investors can now invest up to Rs.50,000 and the KYC process can also be completed online. If the amount invested exceeds Rs.50,000, investors are required to complete the KYC process physically.

  5. Low cost

    As low as Rs.5,000 (lump sum) can be invested in a mutual fund and Rs.500 per month can be invested through a SIP (Systematic Investment Plan). Therefore, you don’t have to wait until you have amassed a large amount before investing. You will also not have to pay any additional commissions to distributors or agents if you invest in a Direct Plan of a mutual fund scheme.

  6. Disciplined investing

    A Systematic Investment Plan (SIP) is a tool mutual funds offer to encourage a habit of regular investing. Investing in SIPs allows investors to invest small amounts regularly, whether that be weekly, monthly, or quarterly. Your SIP can be set up to automatically debit a fixed sum every month from your bank account through an auto-debit facility. Investments in SIPs can be made regularly and without needing to invest manually every time.

    Invest in mutual funds now that you know their advantages and how to do it, and watch your wealth grow.