How to invest in mutual funds

If you want to take advantage of the stock and debt market, then you should start by investing in mutual funds

Kavya Balaji   /   February 19, 2021

Most investors in India are not market experts. They rely on stock brokerages to invest in stocks and bonds. However, if you want your stock and debt investments to be professionally managed, you can consider investing in mutual funds. These are companies that invest in stocks and fixed-income investments for you by pooling money from different investors. The portfolio is managed by a fund manager who will be a stock/debt market expert. It is easy to invest in mutual funds online or offline. However before investing in mutual funds, you need to follow these steps.

Step 1: Look at your financial goals

Everyone has financial milestones to achieve, right? These goals could be for the short-term or long-term. Identifying your goals will help you invest right. For instance, if one of your goals is to buy a house within the next seven years, then it makes sense for you to invest in an equity mutual fund to meet this goal. Equities are the best wealth-creation instruments for long-term goals. On the other hand, if your goal is to buy a car in the next three years, you can invest in debt mutual funds.  as they provide higher returns than other investment avenues.

Step 2: Stay invested

When it comes to equities, discipline matters. Markets don’t keep going up. They could be volatile at times. If you stay invested, your investments will be affected by short-term volatilities. Patience and discipline can make a significant difference to your wealth and portfolio returns in the long run.

Regular investments in mutual funds allow you to generate wealth. When you invest regularly, the money invested earlier has longer time to work for you. Investing regularly is the best way to achieve long-term financial goals. For instance, a monthly investment of Rs. 5,000 can become Rs. 4 lakhs in 5 years. If you invest for 10 years, it can be Rs. 12 lakhs and it becomes Rs. 25 lakhs in 15 years. 

Step 3: Diversify your portfolio

Every portfolio should have different kinds of asset classes and investment instruments. This will help to minimise risks while allowing you to earn optimal returns. The various kinds of mutual funds can help you diversify your investment portfolio.

Step 4: Assess your risk appetite

With equities, there is always the risk of market volatility when the market is down. So, if you are totally averse to risks, you should invest in debt mutual funds. If you have a moderate risk profile, you can choose an optimal distribution across equities and debt. A person who is young can put the majority of his/her investments in equities.

Step 5: Stick to your time horizon

You should set a time frame for each of your financial goals. This will help you decide how much you have to invest and the kinds of mutual funds you will require. You should choose schemes which are in line with your goal, time frame, and risk appetite.

Step 6. Identify your fund category

The answer to this question springs directly from the answers you give to points 1, 4 and 5. Here is a table that will help you navigate this process, although this is not to be followed strictly as you could be flexible too. 

Time HorizonHigh Risk Appetite Medium Risk AppetiteLow Risk Appetite
Less than 1 yearLow duration fundsLow duration fundsLiquid funds
1 – 3 yearsCredit Risk fundsShort duration fundsLow duration funds
3 – 5 yearsAggressive Hybrid fundsCredit Risk fundsShort duration funds
Above 5 yearsMulticap fundsLarge Cap Funds Aggressive Hybrid funds

We have not covered all 36 categories in the table as it is not feasible. There are several mutual fund categories that suit some people but not others. For instance overnight funds are more geared towards corporate treasuries, sector funds are suited for people with a high level of risk appetite and the ability to ride the ups and downs of a sector’s fortune. International funds may suit you if you have goals or expenditures such as foreign travel or education or for someone who wants to diversify geographically.. 

Step 7. Identifying funds

Once you’ve identified your fund category you can use parameters like returns, performance in bear markets, fund manager history and fund ratings to shortlist a particular fund or couple of funds. We give you our top picks in a few common categories below. Returns and performance keep changing and we encourage you to do your own research as well to supplement our picks. Wealthzi’s Explore Funds section is a good place to do research.

CategoryFund
LiquidAditya Birla Sun Life Liquid Fund, Invesco India Liquid Fund, HDFC Liquid Fund, Axis Liquid Fund
Low durationKotak Low Duration Fund, PGIM India Low Duration Fund
Short durationFranklin India Short Term Income Plan, PGIM India Short Maturity Fund
Credit RiskAditya Birla Sun Life Credit Risk Fund, ICICI Prudential credit Risk Fund, HDFC Credit Risk Debt Fund
Aggressive HybridL&T Hybrid Equity Fund, ICICI Prudential Equity and Debt Fund
Large CapICICI Prudential Bluechip Fund, Axis Bluechip Fund, Mirae Asset Large Cap Fund, SBI Bluechip Fund
MulticapMirae Asset India Equity Fund, Kotak Standard Multicap

Should invest in mutual funds. Mutual funds sahi hai?

Only 5% of the average Indian household’s wealth is in financial assets. Of this only 9% is invested in mutual funds. The RBI’s household finance committee suggests that this under-allocation to productive, wealth-generating assets may be causing households to lose out on wealth creation. If you look at the returns that mutual funds have delivered over the last three, five and 10 years, this seems to be self-evident.

Mutual Fund kyun sahi hai?

Firstly, mutual Funds allow small investors to pool their savings and invest in the stock or bond market. These savings are managed by a professional fund manager at a very low cost.

High returns

Mutual Funds invest in equity and hence are able to deliver high returns over the long term. Multicap equity funds have delivered on average about 18% annualised over the past five years and large-cap funds have delivered 15%. Even debt mutual funds have done well with dynamic bond funds delivering 9.28% annualized over the past five years.

Tax-efficient

The capital gains tax on equity mutual funds held for longer than one year is 10% for the returns exceeding Rs 1 lakh in the financial year. Under Rs 1 lakh, it’s zero. For a holding period less than one year, it’s short term capital gains tax of 15%. For debt funds, it is 20% if the fund is held longer than three years and you also get the benefit of indexation. If a debt fund is held for a shorter period (less than three years), then your gains will be taxed as per your slab. 

Highly regulated

Mutual Funds are tightly regulated by the Securities and Exchange Board of India (SEBI). SEBI prescribes limits on how much they can invest in a single company, how much expense they can charge and various other limits to ensure investor protection. Their value (known as NAV) is published every day. The fund’s holdings are held by an independent entity called the custodian.

Liquidity 

The vast majority of mutual funds can be purchased and sold on any working day. You can buy units directly from the fund and sell them back to the fund. There is a category of funds called ‘close ended funds’ which do not have this feature. However, the units of such funds can be bought and sold on a stock exchange. 

How to invest in mutual funds 

You can invest in mutual funds online or offline. You need to make sure that your Know Your Customer (KYC) norms are completed. You can do this directly with an Asset Management Company (AMC) at their office, or through an investment advisor. Once you have chosen the mutual fund, you have to submit the mutual fund application form which will have details including the bank account of the unitholder. 

You can set up an auto debit if you are investing via the Systematic Investment Plan (SIP). You don’t need a demat account for investing in mutual funds. You can track your investments even if you choose to invest offline. The minimum investment for mutual funds is as low as Rs. 100 for SIP. You can even make one-time investments in mutual funds.

If you are new to the world of mutual funds or don’t understand jargons, then making investment decisions on your own could be risky. You will require a seasoned mutual fund advisor such as wealthzi.com. They will be able to address your investment queries, suggest the right funds, keep track of your asset allocation and investments, and help you buy or sell funds at the right time. Click here to explore the best mutual funds.

How to invest in mutual funds online

Choosing a platform, advisor or website for mutual funds can be tough given the sheer number of options on offer. We take you through them and give you the pros and cons of each. Different ones may suit the needs of different types of investors. 

Online mutual fund platforms

You can invest in mutual funds online through various platforms like Wealthzi or directly on the AMC website. You need to open an investment account on the platform before you can start investing. If you are KYC compliant already, you can start investing right away after uploading the relevant details like your PAN, address proof, bank account details and so on. Online platforms like Wealthzi have partnered with BSE Star MF for providing mutual fund transaction services. The investor transfers the investment amount to the escrow account of BSE Star MF which in turn is paid out to the AMC. The unit allocation is done after the payment reaches the AMC usually in a day or two.

What if the online platform goes out of business

The online platforms or advisors do not ‘hold your money’ once your money has been invested. Your money is transformed into units of mutual funds. The records of your holdings are held by independent Registrar and Transfer Agents (R&Ts) or in demat accounts. A platform going out of business can be an inconvenience from the point of view of managing your investments but your money and holdings will not be lost. 

Also unlike brokers, your mutual fund money goes straight from your bank account to BSE Star MF’s escrow account or the fund house and the proceeds come straight back only to your bank account. The platform does not hold money on your behalf.

Are they regulated? 

Platforms will either be registered as mutual fund distributors (MFDs) with Association of Mutual Funds of India (AMFI) or as Registered Investment Advisors (RIAs) with the Securities and Exchange Board of India (SEBI). All entities operate as per SEBI regulations. Most will display the registration number and status at the bottom of the home page or in the FAQ section.

How does the money transfer happen?

Most platforms will ask you to sign ‘bank mandates’ or ‘one-time mandates’ to let you transfer your money for mutual fund investments. These mandates will usually specify an upper limit such as 1 lakh or 10 lakh. Once the mandate is given, you don’t have to keep logging into net banking to authorize payments for your investments. In case of redemptions, your bank account will typically be linked to your mutual fund records and thus the money will be directly credited to your bank accounts.  

How are fees/commissions usually charged?

Typically, if a platform offers regular plans, the fund house pays a commission of 0.5%-1% to the platform as your distributor. If it offers ‘direct’ plans, it may charge you a monthly fee.

Mutual fund terms you should know

If you are new to the world of mutual funds, there are many terms associated with funds. Here are some of the common ones that you need to know.

Net Asset Value (NAV)

The NAV of a mutual fund is the total value of assets for every unit of the fund that you hold. How is this calculated? The NAV is all the assets the fund is managing minus all related and permissible expenses. This is the price for your mutual fund. Does a low NAV indicate a good buy? This is a myth. The NAV of the fund shouldn’t influence your investment decision. You should look at the scheme, its performance, the portfolio it holds and fund manager expertise before you invest in a mutual fund

Expense Ratio

Total expense ratio indicates the expenses incurred for running the mutual fund. It is usually expressed as a percentage of the total assets under management. These expenses will include the advisory fees and the management charges for the fund. A very high expense ratio could mean lower returns, especially if you are investing in a debt fund. Expense ratio of over 2% is considered to be high.

Systematic Investment Plan (SIP)

SIP refers to investing a fixed amount of money in a mutual fund scheme on a regular basis. An SIP can be monthly, quarterly or daily. Investing in a monthly SIP is better if you are salaried because it matches the frequency of your income. SIPs should not be stopped during market downturns because this beats their whole purpose which is getting more units when the markets drop. As you keep buying more units during market falls, you will get great returns in the long run.

Exit Load

Similar to entry load, exit load is recovered from you when you sell a mutual fund or redeem mutual fund units.

Growth Option

Looking for capital appreciation rather than regular income? Then, you can choose the growth option for mutual funds. Choosing this option will mean that you don’t get any dividends. You will get capital appreciation if the fund does well and the NAV of your fund goes up.

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