A mutual fund is an investment fund that is managed professionally in order to buy securities. It gathers money from different retail or institutional investors to make purchases.
Consider an example. Suppose you want to invest in the stock market but do not have any idea about it. There are other three of your friends in the same situation, so together you four decide to make capital of total INR 10 lakhs by investing INR 2.5 lakhs each. And, then, hire a manager who has expertise in stock market investment along with a good past record. Then you pay the manager for making investment decisions on behalf of your group.
Mutual investment works in the same way. It came into existence to help those investors, who do not have any idea about investments. Here the fund manager appointed by a bank or an Asset Management Company (AMC) to take all the decisions about how to invest in mutual funds.
Types of Mutual funds:
Before knowing how you can invest in mutual funds, it is important to know the different types of mutual fund options that are available. The Indian market consists of four types of mutual funds. They are:
- Equity Mutual Funds: This kind of mutual fund generally invests in the stock market. Though equity mutual funds are volatile but can get you higher potential returns.
- Debt Mutual Funds: It mostly invests in private or government fixed income securities, bonds and debt. As it generates a steady interest income, debt mutual funds are more stable than equity mutual funds and the price fluctuations are comparatively low.
- Tax Saving Mutual Funds: As the name suggests, this lets you save tax and is also known as equity-linked savings schemes or ELSS. Under the section of 80C of the Income Tax Act, 1961, one can save taxes up to Rs.1.5 Lakhs by investing in ELSS. However, there is a three month lock-in period associated with ELSS, during which you are not allowed to withdraw any amount.
- Liquid Mutual Funds: The liquid mutual funds fall in the debt division of mutual funds. They generally invest in short term market instruments such as government securities, treasury bills, and call money. This liquid fund is getting popular among people owing to easy liquidity and higher returns offered than a savings bank account.
Some Tips for Beginners:
Here are some tips for the beginners that they can consider while planning to invest in the mutual fund:
Set your investment goal after proper research and select the suitable fund type
To get the most of your investment, it is very important to make a financial goal along with a proper budget and tenure. All of them play a vital role in your investment. Following these, you will get an idea about the amount that you can set aside for investment and can calculate the risk factor.
A large number of mutual fund scheme options available in the market is enough to make you confused. It is advised that you go for the one which has performed well in the last 5 years. Do not forget to consider other major factors such as credentials of the fund manager, asset under management, port polio components and also the expense ratio. Do proper research and then make a wise choice.
A balanced or debt fund is often recommended to the beginners as it gives higher returns along with minimal risk.
Get a bank account with KYC documents
A bank account is compulsory not only for investment purposes but also to receive the money after the tenure is done. For doing the investment easily through the online mode, the net-banking facility is also required. Lastly, keep all your KYC documents handy.
Choose SIPs over lump-sum investment
A SIP lets you invest funds at different market levels at the same time. Thus, a Systematic Investment Plan or SIP is best for the newbies. There will be a high risk if you put all your money on the same scheme for a longer tenure. In case a scheme fails, you will suffer a huge loss. So, it will be better to choose a SIP, which lets you invest any amount starting from Rs. 500 on a weekly, monthly or yearly basis. SIP also comes with a rupee cost averaging which allows you to earn higher returns.
Consult a mutual fund expert
The entire process of investing in mutual funds is really long and tiresome. From choosing the right one from thousands of schemes to monitoring the performance of the invested funds well, there also can be instances, when you need to switch from under-performing funds. In such cases, It would be better if you take advice from a mutual fund expert.
Though investing in mutual funds can be a daunting task, being a little careful and patient will help you to understand as well as analyze the functioning of the mutual funds. And, once you understand them, you can easily decide a fund suitable for you and invest accordingly.