How to Invest in Mutual Funds? - Mutual Fund Investment Guide for beginners

The total assets under management (AUM) of the Indian Mutual Fund Industry as on October 31, 2023, exceeded INR 46 trillion. In a span of only five years, the AUM has doubled from INR 22 trillion (as on October 31, 2018) to INR 46 trillion (October 31, 2023). The total number of accounts as on the same date was 159.6 million.

Source: Association of Mutual Funds in India (AMFI)

As investor awareness increases, the popularity of mutual funds is expected to see further growth. However, mutual fund investments still comprise a minor component of the overall household savings.

New investors can start investing in mutual funds in several ways. One option is to submit a duly completed application form along with the cheque or draft to an approved Investor Service Center (ISC) or a Registrar and Transfer Agent (RTA).

Investors may also opt for direct investments via the mutual fund website. This means they invest their money directly without using the services of a distributor or any financial intermediary like an AMFI-registered Mutual Fund Distributor. Any individual or a non-individual entity, such as banks, brokerage firms, or online distribution channels may become an AMFI-registered distributor.

How Do Mutual Funds Work?

Asset management companies (AMCs) pool investments from retail and institutional investors. This corpus is then invested as per the schemes’ investment objectives and philosophy in various instruments, such as bonds, commodities like precious metals, money market options, shares, and other assets.

The mutual fund schemes are professionally managed by experienced fund managers with an excellent track record and are knowledgeable about the markets. Fund managers align the investments with the investment objectives to create opportunities that offer capital appreciation and growth.

AMCs levy an annual maintenance charge known as the expense ratio. Investors potentially earn returns through regular dividend payouts, interest, or capital appreciation. The returns can be reinvested to either earn a steady income via the dividend option or create wealth over the long-term with the growth option.

Why Should People Invest in Mutual Funds?

• Risk Diversification

  Fund managers mitigate the inherent risks by diversifying the investments across different asset classes in multiple sectors or issuers. This ensures that even if a certain investment is not performing well, other performing assets support the overall portfolio returns. Diversification is beneficial to significantly mitigate concentration risk related to investing in a single asset class.

• Flexibility

  Mutual funds offer various options based on investors’ requirements and risk appetite. They can opt for equity schemes for long-term goals, such as retirement, children’s higher education, and marriage. Alternatively, they can opt for debt-oriented schemes if their investment horizon is short and their objective is earning a regular income. Additionally, investors can invest a lump sum amount or start a systematic investment plan (SIP) wherein a fixed amount is invested at periodic intervals.

• Professional Management

  Mutual funds are professionally managed by fund managers who ensure the investment objectives are duly met. They are supported by a team of research analysts and sector experts that enables fund managers to choose the appropriate investment options to manage the portfolio and mitigate the investment risks.

• Long-term Capital Appreciation

  Short-term market movements impact the funds’ net asset values (NAVs). However, investors with longer investment horizons can ride through the short-term volatility and build a sizeable corpus over the years.

How to Start Investing in Mutual Funds?

Before investing in mutual funds, investors must be compliant with the Know Your Client (KYC) norms. KYC compliance requires the following documents-

1. Duly completed form, which can be availed from the AMCs or Registrar and Transfer Agents (RTAs); investors may also seek assistance from a registered mutual fund distributor or financial advisor to complete their KYC.

2. Recent passport sized photograph

3. Address proof like Aadhar Card

4. Identity proof like Passport or PAN Card

5. PAN Card copy

The documents along with the form can be submitted to an RTA for further processing and verification followed by updating the KYC status. An important consideration is an in-person verification (IPV), which can be done by visiting any KYC Registration Agency (KRA), RTA, or AMC. Mutual fund distributors are also equipped to complete the IPV process. Several AMCs offer online KYC facilities, which allows investors to upload the necessary documents and complete the IPV via a video call.

How to Invest in Mutual Funds?

Investors can invest either online or offline directly with the AMCs. They need to open an account and provide their personal information. Investors are then required to complete the FATCA form and provide their bank account details along with a copy of a canceled cheque. After KYC verification via Aadhar, investors can transfer the investment amount. For offline investments, the individual needs to visit the AMC office and submit the duly completed application, KYC details, and the investment amount. The direct plans have a lower expense ratio, which offers a potentially higher return when compared to regular plans.

AMFI-registered distributors offer financial advice and execute mutual fund transactions on behalf of their clients. The AMCs pay commission to the distributors and therefore, investors are not charged any additional fees. New investors are advised to invest via a distributor as mutual funds are subject to market risks, and they do not have the knowledge or experience of choosing the appropriate schemes. Mutual fund distributors assist new investors select the most beneficial schemes based on their financial goals and risk appetite.

A third option is to purchase mutual fund units via an online demat account. Investors can use their existing bank and demat accounts to invest their funds by logging into their account and choosing the mutual fund scheme and transferring the investment amount.

How to Invest in Mutual Funds via SIP?

SIPs allow investors to invest a fixed amount at periodic intervals. Investors must register for the SIP and submit a bank Electronic Clearing Service (ECS) mandate. The mandate includes details, such as the investment amount, date, and the chosen scheme. The ECS can be submitted either online or offline to an AMC or RTA. SIPs are an ideal way to meet long-term financial goals.

Before investing in a SIP, investors must-

• Complete their KYC either online or offline.

• Visit the AMC website and choose the scheme.

• Provide their bank information and set up an auto-debit facility.

Investors can continue their SIP investments as long as they desire. Additionally, they may increase or decrease the SIP amount as per their requirements.

How to Invest in Mutual Funds via Lump Sum Investments?

Lump sum investments, also referred to as one-time investments, entails investing the entire capital at one point in time. Investors choose the appropriate scheme based on their investment objectives and risk appetite to invest the entire capital. They can either opt for direct investments or regular plans and are advised to seek expert guidance if required. Investors also need to choose between growth and income distribution and capital withdrawal (IDCW).

The former option reinvests the gains in the scheme. In the latter option, the gains are distributed to the investors according to the discretion of the AMC. Investors looking to build wealth via capital appreciation over the long-term are advised to choose the growth option. IDWC is suitable for investors who want to earn regular income from their investment. However, the dividends and IDWC are subject to tax as per the prevailing income tax slabs.

How to Invest in Mutual Funds based on Asset Classes?

Mutual funds are classified under three categories, namely equity, debt, and hybrid funds-

Equity Funds

These invest in equities and equity-related instruments. The primary objective is capital appreciation. These schemes are further classified as large cap, midcap, and small cap funds based on the market capitalization of the underlying assets. Additional categories include focused, value, contra, thematic, and sectoral funds and each equity scheme has distinct investment risks.

Debt Funds

The corpus is invested in debt and money market instruments and the primary objective of these schemes is income. Debt funds are classified based on their maturity duration, such as overnight, liquid, ultra short duration, low, money market, short duration, medium duration, medium to long-term, and long-term duration. Additionally, debt funds are classified based on the underlying securities, such as corporate bonds, banking and PSU, Gilt, and credit risks. Each type of debt fund has certain credit and returns risk.

Hybrid Funds

Such funds invest across multiple asset classes, such as equity, fixed income, gold, investment trust, real estate, and more. The investment goal is capital appreciation and income. The primary advantage is asset allocation, which diversifies the risks by investing in different instruments. Hybrid funds are classified as aggressive, dynamic asset allocation, balanced advantage funds, conservative, and arbitrage and each scheme has different inherent risks.

How to Invest in Mutual Funds for Tax Savings?

Investments in Equity Linked Savings Schemes (ELSS) are eligible for tax benefits under section 80C of the Income Tax Act. However, investments in ELSS are subject to a three-year lock-in period during which investors cannot redeem their units held. While there is no maximum limit on the investment amount in an ELSS fund, the tax benefits are available for an amount of up to INR 1.5 lakh per annum.

How to Invest in Mutual Funds Online?

If you’re wondering how to invest in mutual funds online, just follow the easy steps below.

Step 1: Visit the official website of the parent Asset Management Company (AMC).
Step 2: Select the mutual fund you want to invest in.
Step 3: Register yourself and update your KYC information.
Step 4: Select your lump sum or SIP amount. Pay the amount online to begin your mutual fund investment journey.

Things to Consider Before Investing in Mutual Funds

Activate Internet Banking

You can invest in mutual funds online by paying the investment amount through debit cards, UPIs, etc. However, investing in mutual funds through net banking is hassle-free, fast, and relatively more secure. You can also create standing instructions to deduct the SIP amount every month automatically from your account. So, you won’t need to remember the SIP dates.

Click Here to Know What is SIP?

Keep KYC Documents Ready

Know Your Customer (KYC) is a statutory process in India for most financial transactions. The process consists of providing personal information in a KYC application form and photocopies of supporting documents like PAN, address proof, etc.

You can invest in mutual funds only if you’re KYC-compliant.

Set a Goal

People invest for various purposes, whether it is early retirement, children's education, buying a house or going on a world tour. What's your goal? More importantly, how much money do you think would be enough to meet your future goals?
Setting up a financial goal and an investment purpose can make you financially disciplined.

Click Here to Calculate Financial Goals

Select the Right Fund Type

Mutual fund types can vary based on investment philosophy, risk, objectives, etc. For instance, investors with a high-risk appetite may choose small-cap equity funds. First-time investors can choose balanced funds with both equity and debt exposure.

Risk-averse investors may go with funds that have higher exposure to debt instruments. Choose the fund according to your temperament and investment objectives.

Also Read - How to Choose a Mutual Fund?

Finalize the Fund

Once you’ve decided the fund type best suited for your needs, shortlist the right fund by comparing different parameters like.

 The reputation of the AMC
 Fund Manager’s credential
 Expense ratio
 Fund size

Diversify

Invest in more than one mutual fund scheme depending on your financial budget. For example, if you’ve planned for a monthly SIP of ₹10,000.00, you can consider purchasing two mutual funds with ₹5,000.00 each. This can help you even out your risk in the time of market volatility.

Click Here to Calculate SIP

Mutual Funds Investment- The Way Forward

Rising inflation and diminishing bank interest rates are unlikely to be enough to cover your future expenses. However, investing in mutual funds can provide a real chance of beating inflation and generating wealth. You already know how to buy mutual funds from the comforts of your home. All you need is a plan and a desire to become financially independent before retirement.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.