How to invest in mutual funds?: A beginner’s guide

How to invest in mutual funds?: A beginner’s guide

We have encountered “Mutual Funds Sahi Hai” at least a hundred times in our life. But the question arises here that what a mutual fund is? In simple words, a mutual fund is a pool of diversified portfolios of securities like shares, debentures, bonds, etc. But we always wonder about How to invest in mutual funds?

The common notion of not keeping all the eggs in the same basket derived from mutual funds. Does this notion provide a view that what if you keep all your eggs in one basket and fall? Similarly, if you put all your money in a single security or industry, then there are chances that you end up losing all your money. The idea behind investing in a mutual fund is to ensure safety and to reduce the risk of losses. When you invest in various types of securities, even if that particular security suffers losses, you still have chances of offsetting those losses from the gain of other securities.

How Mutual Fund Works?

A mutual fund is a type of investment vehicle consisting of a combination or portfolio of stock, bonds, debentures, or other securities. Mutual funds give small or individual investors access to diversified portfolios of such securities. Mutual funds produce capital gains or income for the investors. A mutual fund portfolio is structured and maintained in such a way that it matches the investment objectives stated by the investors. Each shareholder participates proportionally in the gain and losses of the mutual fund. Mutual funds invest in various securities. The value of the mutual funds depends on the performance of the securities it decides to buy. 

Mutual funds are divided into equity funds, fixed-income funds, index funds, balanced funds, money market funds, income funds, global funds, etc. But for beginners, it is not easy to invest in a fund because mutual funds are hazardous. Beginners invest money into mutual funds. They learn about the risk and how to invest in a mutual fund.

Things to Consider as a beginner

Fix an investment goal for yourself

Try to define your financial goals, budget, and period of investment. Doing this will help you decide what you want and your plan for attaining that goal. Investment always works best when it’s done with a purpose.

Choose the right type of fund 

It would help if you did an in-depth study of various securities to decide on the correct category for yourself. Experts usually recommend a balanced or debt fund for first-time investors as it comes with minimal risks while providing higher returns.

Shortlist and choose one mutual fund

With plenty of mutual fund schemes available in each category, you need to analyze and compare them to pick the right one. Investors should not ignore important factors such as the fund manager’s credentials, expense ratio, portfolio components, and assets under management.

Diversify your portfolio

It would help if you considered investing in more than one mutual fund. A portfolio of funds will help you diversify across securities and industries. It will also balance out the risk. When one security underperforms, the other makes up for the loss without bringing down the worth of your entire portfolio. 

Go for SIPs instead of lump-sum investments

Investing via SIPs is advisable for those investing in equity instruments for the first time. The benefit of rupee cost averaging that comes with SIPs also helps earn higher returns in the long term. While a lump-sum investment can put you at the risk of getting a market peak, a SIP allows you to spread your investments over time and invest at different market levels.

Keep KYC documents updated

You cannot invest in a mutual fund if you have not done your Know Your Customer (KYC) process yet. KYC is a government regulation for most of the financial transactions in India. To become KYC-compliant, you need to have a  PAN card and valid address proof. 

Open a Net Banking Account

To invest in mutual funds, you need to activate internet banking on your bank account. Mutual funds also allow investments to be made through debit cards and cheques, but investing via net banking is a more straightforward and secure process.

Seek advice from a mutual fund expert

The entire process of investing in a mutual fund provided above can be monotonous. With thousands of funds available to choose from, the performance of the funds also needs to be monitored continuously. I would suggest getting the services of a mutual fund expert if you find investment in mutual funds a problematic task.

Why should you invest in mutual funds?

There is a famous saying by Plato, “ each man is capable of doing one thing well.” Said, mutual fund managers are specialized in investment activities. They know where to invest your fund for your particular investment goals. It is better to leave it to the experts who have good knowledge of mutual funds. A good investment advisor can help you earn better returns on your investments and minimize the overall risk. In the opinion of experts, the best option for you as an investor is to achieve your self financial goal through mutual funds. The numerous benefits of investing in mutual funds are the growing popularity of mutual funds among ordinary people. Some of them are listed below: 

Diversified portfolio:- Mutual funds invest in two main asset categories- debt and equity. Some funds are debt-oriented, and some invest in just equity. The primary and essential benefit of investing in mutual funds is the exposure you get to various shares or fixed-income instruments. If a few securities in a portfolio did not perform well, you still could get a good return. Mutual funds ensure diversification. If you are a lay investor who does not want to spend much time researching stocks, you should surely go for mutual funds.

Liquidity: If you invest in open-ended mutual funds, you can buy and sell your units at any time. Close-ended funds can also be liquid, even though they are for a fixed duration. They are freely bought and sold.  There is always high-level liquidity.

Flexibility: One of the essential advantages of mutual funds is flexibility. You can opt for a lump sum investment plan. Lump-sum investment wark well if you have idle cash. Or you may go for Systematic Investment Plans(SIPs).

Low initial investment: you don’t need to invest a massive amount of funds in a mutual fund. You can begin with investing in lump sums or SIPs as low as ₹500 monthly.

Tax saving: One of the most crucial benefits of mutual funds is saving income tax. Your taxable income may be reduced by as much as Rs 1.5 lakh under section 80C of the income tax act, 1961.

So if you are a beginner, and want to try your luck in mutual funds, then go ahead and start investing.

Also, do read our article on How to invest in the share market?: A Step by Step Guide for beginners


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