Mutual fund investing may seem complicated to inexperienced investors due to a lot of confusion. However, the first step in your investment journey is to fully grasp how mutual funds operate. With few alternative investment options, Systematic Investment Plan (SIP) gives you the freedom to invest as little as Rs. 500 in a mutual fund. Continue reading to know how to invest in mutual funds.
Additionally, the Indian Mutual Fund Industry reported average assets under management (AAUM) of INR 38,56,140 crore in February 2022. It is noteworthy that the sector crossed the INR 10 trillion threshold (INR 10 lakh crore) for the first time in May 2014, marking an important milestone. In 2018, there were 9,599 mutual funds operating in the United States, with assets under management totaling about 17.71 trillion dollars. The industry AUM in India was $339.42 trillion (or 39.42 lakh crore) as of March 31, 2023.
You can choose from a variety of mutual funds that have investment goals and risk profiles that match your risk tolerance. Here, we will tell you how to invest in mutual funds like a pro.
What are Mutual Funds?
A financial tool called a mutual fund pools money from several investors. Following that, these funds are invested in a variety of securities, including publicly traded firm stocks, treasury bonds, corporate bonds, and money market instruments. You have access to the knowledge of a qualified fund manager and the regulatory security offered by the Securities Exchange and Board of India (SEBI). Continue reading to know how to invest in mutual funds.
What are the Benefits of Investing in Mutual Funds?
If you want to know how to invest in mutual funds these are the advantages of mutual funds highlighted by the following things:
Strict Regulations:
The Securities and Exchange Board of India (SEBI) oversees the regulation of mutual funds in India. To enhance transparency, risk management, investor protection, and fair valuation standards, SEBI has set extensive rules.
Flexibility:
In terms of investment amounts, mutual funds offer flexibility. You can invest based on your needs and financial ability. For instance, those who earn a salary can choose a Systematic Investment Plan (SIP) that enables recurring investments of a defined amount based on their financial situation and convenience.
Easy Accessibility:
Mutual funds are readily available and can be bought from any location in the world. Funds are offered and distributed by numerous asset management companies (AMCs) via a variety of channels, including brokers, agents, and internet marketplaces.
Shorter Lock-in Period:
Lock-in periods for tax-saving mutual funds like ELSS (Equity Linked Savings Scheme) are shorter—only three years—than those for PPF, FDs, ULIPs, and other tax-saving investments.
Easy Redemption:
Depending on the type of scheme, mutual funds have easy redemption possibilities. To meet their financial needs, investors, for instance, can redeem units of overnight and liquid funds on any business day.
Open-Ended Flexibility:
Flexibility of Open-Ended Plans: Since withdrawals and subscriptions are permitted on any working day, open-ended plans offer a high degree of flexibility.
A Step-By-Step Guide on How to Invest in Mutual Funds
Mutual funds are a wonderful approach to diversify your portfolio for the majority of investors without incurring significant additional costs or trouble. If you are a beginner and looking for how to invest in mutual funds, you are at the right place. To begin investing in mutual funds, simply follow these ten easy steps. Continue reading to know how to invest in mutual funds.
Step 1: Select Your Mutual Fund Investment Objectives.
- The determination of financial objectives, budget allocation, and time horizon have a significant impact on investments. When selecting mutual funds, take your investment objectives into account.
- Decide whether your objectives are long- or short-term. This will enable you to calculate how much you can set aside for investments while taking your risk tolerance into account.
- Choose a bond market mutual fund if your objective is to save for a recent purchase, such as a home or automobile. High-yield savings accounts provide greater liquidity and government insurance coverage of at least $250,000 for people who need access to money right away.
- Stock mutual funds, on the other hand, are a great option if you’re investing for long-term objectives like retirement or your child’s education.
Step 2: Select the Proper Mutual Fund Approach
Following is a list of investment strategies broken down by the time frame of your goals. Continue reading to know how to invest in mutual funds:
- Near-term Goals: Allocate 30% to stock mutual funds and the rest to bond funds. Consider Vanguard Equity Income Fund (VEIPX) and PIMCO Total Return (PTTAX).
- Mid-term objectives: Opt for balanced mutual funds with bonds and stocks. American Funds American Balanced Fund (ABALX) and Vanguard Wellesley Income Fund (VWINX) are good options.
- Long-term objectives: Allocate 70-100% to stock-based mutual funds. Look for growth funds like Vanguard Growth Index Fund (VIGAX) and Fidelity Growth Discovery Fund (FDSVX).
Step 3: Examine Prospective Mutual Funds
When examining mutual funds, take into account the following elements. Continue reading to know how to invest in mutual funds:
- Load costs: Mutual funds can be “load” or “no-load.” Avoid load fees whenever possible and consider alternative options without such fees.
- Past Results: Past performance doesn’t guarantee future success, but comparing a fund’s performance to similar funds or benchmark indices can provide insights.
- Management: Actively managed funds aim for higher returns but charge higher fees. Index funds passively track an index’s performance with lower fees.
- Expense Ratios: Annual fees cover fund management expenses. The industry standard expense ratio is 0.57%, but many funds charge less. Even though most ratios are below 1% or 2%, paying attention to these numbers is crucial.
Step 4: Narrow Your List Down to One Mutual Fund
It is essential to carefully evaluate and contrast the numerous possibilities offered in the various mutual fund categories in order to choose the best investment. Consider important factors when evaluating mutual fund schemes:
- Fund manager qualifications and track record.
- Performance impact of a skilled fund manager.
- Expenditure ratio reflects fees for managing investments.
- Select funds with lower expense ratios to maximize returns.
- Evaluate assets under management (AUM).
- Larger AUM indicates investor confidence.
- Assess fund size in relation to investment strategy.
Step 5: Create an Investment Account
The following programmes are available for investment if you independently open a brokerage account. Continue reading to know how to invest in mutual funds:
- Taxable brokerage accounts: Online accounts without tax advantages but allow penalty-free withdrawals. Ideal for pre-retirement goals before age 59 1/2.
- Education savings accounts: 529 college savings account for future tuition. Invest in mutual funds to cover school costs.
- Individual retirement accounts (IRAs): Tax-advantaged option to purchase retirement mutual funds.
- Employer-sponsored retirement plans: Access to mutual funds through plans like 401(k) or 403(b). Hassle-free investing in mutual funds or target-date funds.
Step 6: Add Variety to Your Portfolio
- Diversify your portfolio: Invest in multiple mutual funds to optimize your investment strategy and achieve risk-adjusted returns.
- Reduce risks and offset underperforming funds: Diversification helps minimize the impact of poorly performing funds by balancing them with others that are performing well.
- Maintain portfolio value: A diversified portfolio provides stability even during market turbulence or when specific funds are not meeting expectations.
- Expand exposure: Diversifying across various mutual funds offers exposure to different sectors, industries, and geographical areas.
- Long-term growth and protection: Diversification enhance the potential for portfolio growth while safeguarding against significant downturns in specific industries or asset classes.
Step 7: Choose SIPs Over Lump-sum Investments.
- SIPs allow you to invest in a staggered manner, spreading your investments over time.
- This approach helps avoid the risk of investing a lump sum at market peaks. SIPs enable you to invest a fixed amount regularly, regardless of market conditions.
- Rupee cost averaging is a key benefit of SIPs.
- Buying more units when prices are lower and fewer units when prices are higher helps balance out the overall cost of your assets.
- SIPs provide the discipline of regular investing and allow you to take advantage of market volatility.
- Rather than trying to time the market, SIPs offer a methodical strategy to navigate market ups and downs.
Step 8: Maintain KYC Records and Open a Net Banking Account
- Complete the KYC process before investing in Indian mutual funds to comply with legal requirements.
- KYC aims to identify the source of funds and prevent money laundering.
- Provide PAN card and valid address proof for KYC compliance.
- Use ClearTax platform for convenient KYC completion.
- Enable online banking for simplified and secure mutual fund investments.
- Online banking offers a seamless experience and protects your financial activities.
- Follow KYC procedure and choose net banking for safe and compliant investing.
Step 9: Create a Strategy to Continue Investing Regularly.
Investment is an ongoing practice to accumulate money and meet financial goals. Set up recurring investments on your brokerage platform for convenience.
- Consistent investing reduces the risk of buying at high prices and allows buying more when prices are low.
- Regularly review your investments, at least once a year.
- Consider using a robo-advisor for portfolio management and rebalancing.
- Dollar-cost averaging helps lower fees and expand investments
Step 10: Take into Account Your Exit Strategy.
Cashing out mutual funds with backend loads may incur fees imposed by your broker. Consider potential tax consequences, especially regarding capital gains.
- Taxes on capital gains are usually applicable unless investments are held in tax-advantaged accounts.
- Seek advice from a financial counsellor or tax expert to navigate these considerations.
- Eventually, you may need to sell mutual fund shares to meet financial goals.
- Consult with a financial advisor or tax expert for guidance on selling shares and managing tax responsibilities efficiently.
Few Best Mutual Funds with Good Returns in India
Mutual funds are divided into three categories, namely equity, dept, and hybrid. Here are some top mutual funds that provide good returns in India for these categories.
Equity Mutual Funds
| Fund Name | 3-year Return (%) * | 5-year Return (%) * |
| Quant Small Cap Fund Direct Plan-Growth | 65.32% | 25.60% |
| Quant Tax Plan Direct-Growth | 44.76% | 23.55% |
| Quant Infrastructure Fund Direct-Growth | 53.12% | 22.16% |
| ICICI Prudential Technology Direct Plan-Growth | 39.19% | 21.53% |
| Quant Active Fund Direct-Growth | 40.95% | 21.46% |
| Axis Small Cap Fund Direct-Growth | 39.69% | 21.39% |
| Aditya Birla Sun Life Digital India Fund Direct-Growth | 36.49% | 20.88% |
| Quant Mid Cap Fund Direct-Growth | 40.30% | 20.82% |
| SBI Technology Opportunities Fund Direct-Growth | 33.18% | 20.62% |
| Tata Digital India Fund Direct-Growth | 36.47% | 20.44% |
Dept Mutual Funds
| Fund Name | 3-year Return (%)* | 5-year Return (%)* |
| Bandhan Government Securities Investment Plan Direct-Growth | 4.74% | 8.95% |
| Aditya Birla Sun Life Medium Term Direct Plan-Growth | 16.39% | 8.93% |
| DSP Government Securities Direct Plan-Growth | 5.11% | 8.93% |
| Bandhan Government Securities Fund Constant Maturity Direct-Growth | 3.95% | 8.83% |
| SBI Magnum Gilt Fund Direct-Growth | 5.51% | 8.79% |
| ICICI Prudential Constant Maturity Gilt Fund Direct-Growth | 4.60% | 8.77% |
| Nippon India Gilt Securities Fund Direct-Growth | 4.77% | 8.61% |
| Kotak Gilt Investment Direct-Growth | 5.20% | 8.58% |
| Edelweiss Government Securities Fund Direct-Growth | 5.97% | 8.56% |
| Edelweiss Banking and PSU Debt Fund Direct-Growth | 5.90% | 8.52% |
Hybrid Mutual Funds
| Fund Name | 3-year Return (%)* | 5-year Return (%)* |
| Quant Multi Asset Fund Direct-Growth | 39.10% | 21.62% |
| Quant Absolute Fund Direct-Growth | 35.36% | 19.74% |
| Kotak Multi Asset Allocator FoF – Dynamic Direct-Growth | 25.36% | 16.69% |
| ICICI Prudential Equity & Debt Fund Direct-Growth | 29.28% | 15.44% |
| ICICI Prudential Multi Asset Fund Direct-Growth | 28.21% | 15.09% |
| Baroda BNP Paribas Aggressive Hybrid Fund Direct – Growth | 20.55% | 14.11% |
| HDFC Balanced Advantage Fund Direct Plan-Growth | 29.04% | 13.73% |
| Edelweiss Aggressive Hybrid Fund Direct – Growth | 25.05% | 13.71% |
| Kotak Equity Hybrid Fund Direct-Growth | 26.53% | 13.63% |
| HDFC Retirement Savings Fund – Hybrid Equity Plan Direct-Growth | 25.29% | 13.40% |
Conclusion
Mutual funds offer strong investment options for long-term prosperity, catering to diverse objectives. Benefits include diversification, cost efficiency, flexibility, and skilled fund management. To invest: set goals, research and select a fund, open an investment account. Furthermore, consider the above steps for how to invest in mutual funds and get started!
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