How to Invest in Mutual Funds

A mutual fund (MF) is a good investment avenue to earn high returns on a low lock-in period. Looking to park funds in an MF scheme, but not sure how to kick start your investment journey? Fret not!

Nowadays, you can invest in MF schemes and enjoy superior wealth creation in just a few clicks. Read on to find out more.

What are mutual funds?

Mutual funds are investment instruments that pool money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, and other assets. They are managed by professional fund managers and allow investors to access a broader range of investments while managing risk.

There are different types of mutual funds to cater to various investment goals and risk appetites, including equity funds, debt funds, balanced funds, index funds, and more.

How to invest in mutual funds - 5 easy steps

If you're planning to invest in mutual funds, here are 5 simple steps to get started:

Step 1: Risk profiling

Before investing in mutual funds, it’s essential to assess your risk tolerance. Evaluate factors like your age, income, financial goals, and investment horizon to determine the level of risk you're willing to undertake.

Step 2: Asset allocation

Once you have a clear understanding of your risk profile, the next step is asset allocation. This involves deciding how you want to distribute your investment across different asset classes such as equities or debt. This will help you create a balanced portfolio and manage risk.

Step 3: Identifying funds

The next step is to identify specific mutual funds that invest in each asset class. Research and compare funds based on their past performance, fund manager’s track record, expense ratio, and investment strategy.

Step 4: Selecting the mutual fund scheme

Once you've narrowed down potential funds, the next step is to select the mutual fund scheme that best matches your investment goals and risk tolerance. Make sure to review the fund's objective, past performance, and expense ratio to make an informed decision.

Step 5: Diversifying investments

Spread your investments across various funds and asset classes to reduce the impact of a poorly performing investment. After investing, regularly track your mutual fund portfolio to ensure it remains aligned with your financial goals.

How to invest in mutual funds online?

You can easily start investing in mutual funds online from the comfort of your home. Here are two ways to do this:

- Create an account on the AMC's website

Every Asset Management Company allows investors to register and invest in mutual funds through their website. All you need to do is visit the official website of your preferred AMC and complete the registration with details like your name, email address, phone number, and PAN. Then, complete the KYC, select your desired mutual fund scheme and start investing.

- Invest through an app

Many AMCs and financial institutions offer mobile apps that make investing in mutual funds even more convenient. You can simply download your preferred app to register and complete the KYC process. Then, browse through the various mutual fund schemes available on the app and select one that fits your investment strategy and goals. Finally, make the payment to start your investment.

Cost of investment associated with mutual fund investment

Investing in mutual funds comes with various costs that you should be aware of. These include:

- Management fee: Also known as the expense ratio, this fee is charged by the mutual fund company for managing the investment portfolio. It covers the cost of research, fund management, and administrative expenses. 

- Exit load: The exit load is a fee that the investor needs to pay when they redeem their mutual fund units before a specified period. It varies depending on the mutual fund scheme and can range from 0.5% to 2% of the redemption amount.

- Broker commission: If you're investing in mutual funds through a broker or financial advisor, they may charge a commission for their services. 

- Transaction charge: This is a one-time fee for investing in the mutual fund and can vary depending on the AMC you select.

- Selling costs: When you sell your mutual fund units, you might have to pay taxes and charges like Securities Transaction Tax (STT) and stamp duty.

Points to keep in mind before investing in mutual funds

Investing in mutual funds can be a rewarding experience, but it's important to consider several key factors to ensure your investment aligns with your financial goals and risk tolerance. Here are some essential points to keep in mind before investing in mutual funds:

- Investment goal

Before investing in mutual funds, it's important to clearly define your investment goals. Whether you are saving for retirement, children's education, purchasing a home, or any other financial objective, having a specific goal will help you choose the right mutual fund scheme.

- Risk factor

Understanding your risk tolerance is essential before investing in mutual funds. Mutual funds come with varying levels of risk, depending on their investment strategy and underlying assets. For example, equity funds can be more volatile and suitable for investors with a higher risk appetite. On the other hand, debt funds are generally safer but offer lower returns. So, assess your risk tolerance and select a fund that matches your risk appetite.

- Selecting the right fund

Selecting the right mutual fund involves thorough research and comparison. Consider factors such as the fund's past performance, expense ratio, fund manager's track record, and the fund's investment strategy. It's also important to compare different funds within the same category to make an informed investment decision.

- Keeping KYC documents updated

Before investing in mutual funds, make sure your KYC documents are up-to-date. KYC is a mandatory process for all investors in India and includes submitting identity and address proof documents. Keeping all documents updated ensures a seamless process and avoids any delays.

Conclusion

Despite the abundance of investment options available, mutual Funds remain one of the best and most practical ways to invest your money.

One of the main advantages is that your money will be professionally managed by fund managers who have done extensive market research. Not to mention, one of the key advantages of investing in Mutual Funds is the diversification of your portfolio.

So you see, investing in an MF scheme is easy! With Tata Capital’s Moneyfy app, select schemes aligning with your financial goals, risk appetite, and investment objectives from the comfort of your home.

FAQs for investing in mutual funds

1. Can I invest Rs. 100 in a mutual fund?

Yes, many mutual funds allow you to start investing with as little as Rs. 100. This is typically done through a Systematic Investment Plan (SIP), which lets you invest small amounts regularly.

2. Is mutual fund tax-free?

No, mutual funds are not entirely tax-free. While some mutual funds, like Equity Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act, other types of mutual funds are subject to capital gains tax.

3. Do mutual funds pay daily?

No, mutual funds do not pay returns daily. You can realize returns when you sell your units at a profit or receive periodic dividends from the fund.

4. Can I self-invest in mutual funds?

Yes, you can self-invest in mutual funds through the AMC's website or through mobile apps. Checkout Moneyfy App by Tata Capital to invest in mutual funds. 

5. How much will I get if I invest Rs. 50,000 in mutual funds?

The returns on a Rs. 50,000 investment in mutual funds depend on several factors, including the type of mutual fund, market conditions, the investment period, and the fund's performance.