How to start investing in mutual funds
4 months ago
Mutual funds have emerged as a good investment option for investors. The popularity of mutual funds is increasing as more and more investors are coming forward to invest in mutual funds. Still, there are many investors who are confused about how to proceed. In this article, we are going to tell you about how to start investing in mutual funds? But before knowing that you need to understand what is a mutual fund?
What is mutual fund?
Typically saying, a mutual fund is a pool of money made up with the contribution of different investors that is managed by the fund manager. The contributed money is invested in different securities such as stock, bonds, gold, etc. Basically, it provides a gateway to enter into the share market with diversified risk and less cost.
Let’s understand with an example-
There are three persons A, B and C. all of them want to invest in share market but following the following problems:
- Have only 200 rupees to invest but the share is of 1000
- Do not have knowledge about the financial market
- Afraid of volatility of market.
Here comes the role of mutual funds. With mutual funds, all given problems can be solved. The money will be collected from A, B and C and the investment will be made in securities then, units will be provided to them according to their contribution. Thus, A can have units according to his investment, B can avail the benefit of professional management of his funds by fund manager and C can diversify its risk and can enjoy investing in the share market.
Things you need to consider before investing:
Define your goal
- Defining your financial goal is one of the foremost thing that you need to do before any investment.
- You need to understand the risk you are willing to take and your capacity to take risk.
- Choose your fund according to your financial goal for example for short term financial goals you can choose debt mutual funds and for longer term financial goal you can choose equity mutual funds. As equity mutual funds are more volatile in comparison to debt mutual funds.
- The risk involved in mutual funds such as market risk, credit risk, interest rate risk, liquidity risk etc.
- Choose only that mutual fund scheme that suits your risk capacity and financial goal.
- Try to diversify your portfolio that will reduce your risk.
- Before investing consider the exit load and annual expense charges involved in the fund.
- If you don’t have knowledge about mutual funds or you are facing time constraint, you can take advice from mutual fund advisor.
Perquisites to start investing in Mutual funds
There is no complex process which you need to perform for investing in mutual funds. You need to do just two things- be a KYC compliant and have a bank account. As mandated by SEBI you need to be a KYC Compliant for investing in mutual funds. You can get your KYC done with mutual fund advisor or on online platforms or can directly approach AMC also. It is a one-time process to verify your identity. For becoming a KYC compliant you need to provide PAN card and address proof. As for bank account,it is advisable to activate net banking facility of the account because investing via net is more convenient and secure.
Choose your plan:
There are two types of plan direct plan and indirect plan that you should know before start investing in Mutual funds. Let’s know about these plans in brief:
In a Direct plan, investors can directly buy the funds from AMC, hence the name. There is no involvement of any intermediary. These plans charge lower annual expenses. Direct plans are generally advisable for those investors who have knowledge about mutual funds and its mechanism. In other words, who are capable of maintaining their portfolios according to their requirements can buy a direct plan.
In a Regular plan, investors buy funds via intermediary means there is an involvement of a third party. These plans involve higher annual expenses in comparison to direct plans. Those investors who are new in mutual funds or who have knowledge or time constraints can invest via intermediary such as fund advisor, distributor, or broker.
So you can choose any plan after taking consideration your requirements.
Where to start investing?
There is a number of platforms or channels that you can choose from such as RTA, ISC, and Mutual funds house, etc. to start investing in Mutual funds.
SIP or Lump sum
A mutual fund provides flexibility to its investors by providing the option of SIP and Lumpsum investment. In the first option, all the money is invested at once on the other hand in SIPs, the specific amount of money is invested at regular intervals. You can select any option according to your requirement.
After investing your money you can track the performance of funds. Whether it is performing well or not. You can redeem your investment whenever you need to directly or via intermediary according to the plan you have chosen. The exit load and taxation should be taken into consideration.
Disclaimer: Taking advice from a mutual fund advisor before start investing in mutual funds is recommended.