Home » MUTUAL FUND INVESTMENT GUIDE: HOW TO INVEST IN MUTUAL FUND PLANS

MUTUAL FUND INVESTMENT GUIDE: HOW TO INVEST IN MUTUAL FUND PLANS

by Sonal Shukla

Introduction

Lakhs of Indians use mutual funds to meet their financial goals. But if you do not know what they are all about or how to begin investing in mutual funds, here can be a good start. Like most financial products, mutual funds may appear tricky. But they are relatively easy to understand with a bit of assistance.

 

What is a Mutual Fund?

 

A mutual fund is a reservoir of money gathered from like-minded investors invested in bonds and stock securities. Every unit in the mutual fund scheme represents a proportional interest in the portfolio. That means the more units you purchase, the larger your interest in the mutual fund. In India, there are thousands of funds that invest in large companies, mid-sized companies, small industries, specific sectors and geographies and even certain economic sectors.

 

Who Can Invest in Mutual Funds?

 

Mutual funds are ideal investment vehicles for every individual at various points in their investing life. Mutual funds hold assets such as stocks, bonds, commodities and a blend of multiple asset classes. Before investing in a mutual fund, it’s crucial to conduct due diligence and research to ensure you understand the underlying scheme assets.

 

Mutual funds are ideal investment vehicles for new and experienced investors alike. Every kind of investor can benefit from the diversification benefits it provides and look for funds they consider are poised for growth. However, it’s not all about the mutual fund itself, but what goes into the fund portfolio that ascertains whether the investment can help achieve the financial goal.

 

How Do Mutual Funds Work?

 

Since a mutual fund is a pool of money collected from investors, it is managed and operated by Asset Management Companies [AMCs]. Every mutual fund scheme offers a specific investment objective that caters to a distinct investment requirement. Based on the mutual fund’s purpose, the pool of money is invested in various assets such as shares, bonds, commodities, gold, and other securities. 

 

Expert professionals known as fund managers steer the scheme to obtain optimum returns from the fund’s investments. These fund managers are entrusted with overseeing every fund. As a result, the income yielded by a mutual fund scheme is typically divided and distributed among all the investors proportionately.

 

Advantages of Investing in Mutual Funds

 

  • Diversification. The charm of investing in mutual funds is that every rupee you invest in it is diversified. That means every rupee is allocated proportionately across all investments and securities within the scheme.
  • Professional management. An expert financial professional adept at handling and analyzing mutual funds steer the fund on behalf of the investors. The fund manager has a team of researchers that track the market and allow the fund manager to make necessary changes to the mutual fund portfolio to maximize returns based on real-time market updates. Most investors who do not have time to track markets or make timely investments find active mutual funds managed by fund managers an ideal option.
  • Hassle-free and easy. Investing in mutual funds is convenient. You can begin your mutual fund journey from the comfort of your home through the paperless KYC process and in a matter of minutes. In addition, you can also track your holdings and make necessary portfolio adjustments through your smartphone or computer at any time and place.
  • Systematic Investment Plans. If you are under the assumption that you can only invest in mutual funds if you have a large sum of money, you may be surprised to know that you can now begin investing in mutual funds with just ₹500 per month through a Systematic Investment Plan [SIP]. A SIP helps you regularly invest small amounts for an extended period to meet your future financial goals. SIPs are ideal in lowering your investment costs and giving you the power of rupee cost averaging and the benefits of compounding.
  • Tax benefits. Investing in Equity Linked Saving Scheme (ELSS) offers you tax benefits of up to ₹1.5 lakhs per year according to Section 80C of the Income Tax Act. Not only that, but ELSS also has one of the shortest lock-in periods of all tax-saving investments. This makes it a popular and highly sought-after tax saving option among investors.

 

Types of Mutual Funds in India

 

Since every mutual fund aims to achieve definite goals, they are divided into various groups. Let’s look at some of the popular mutual funds you can find in India.

 

Mutual Funds Based On Asset Classes

 

  • Debt funds. Also regarded as fixed-income funds, these mutual funds invest in bonds, money market instruments and government securities. These funds aim to provide steady returns to the investor with low risk. If you’re looking to earn a regular income and have a low-risk appetite, debt funds can be an ideal option.
  • Equity funds. Equity funds invest a substantial portion of the money in shares or stocks. The main aim of these is to achieve capital appreciation. However, since returns on equity mutual funds are linked to market movements, they hold high risk. However, if you’re looking to achieve long-term goals such as plan for retirement to buy a house, investing in mutual funds can be an ideal choice as the investment risk is spread over an extended period.
  • Hybrid funds. These funds give you the benefit of both debt and equity in a single fund—they invest in a blend of fixed income securities and equities. Hybrid funds are further classified into several categories. These include:
    • Conservative hybrid funds that invest approximately 75 to 90% of assets and debt and around 10 to 25% in equity or equity-related instruments.
    • Balanced hybrid funds that invest approximately 40 to 60% into equities and 40 to 60% into debt.
    • Aggressive hybrid funds that invest approximately 65 to 80% in equity and around 20 to 35% in debt.
    • Dynamic asset allocation funds that invest in equity and debt and their fund allocation is managed dependent on predefined market indicators.
    • Multi-asset allocation funds that invest in at least three asset classes with a minimum allocation of approximately 10% in all the three asset classes.
    • Arbitrage funds that invest a minimum of 65% in equity and equity-related instruments.
    • Equity savings funds that invest at least 65% into equity and 10% in debt.

 

Mutual Funds Based On Structure

 

  • Open-ended mutual funds. These are funds that can be bought and sold at any time based on their Net Asset Value [NAV]. Typically, most mutual funds in the market are open mutual funds and can be a good option for liquidity as they can be purchased and redeemed at any time.
  • Close-ended mutual funds. These funds come with the predefined majority. This means you can invest in the fund only when it is launched. Once you’ve invested, you can withdraw your money only after the fund matures. Close-ended mutual funds are listed like shares in the stock market, but they are not liquid since their trading volumes are lower.
  • Interval mutual funds. These funds invest in both debt and equities. Interval mutual funds combine the features of both close-ended and open-ended funds. However, these funds do not allow you to buy or sell fund units at any time as there are specific predefined time frames through which you can purchase and redeem fund units.

 

Mutual funds Based on the Investment Objective

 

  • Growth mutual funds. The main aim of growth funds is capital appreciation. They place a substantial allocation of the money in shares and growth sectors. If you’re looking to invest long-term, it is ideal to invest in growth funds.
  • Income funds. These are debt funds that aim to provide you with a regular income. These funds invest in commercial papers, government securities, bonds, debentures, certificates of deposits, among others. Income funds offer a steady source of income in the short run for low-risk investors.
  • Liquid funds. These funds invest in short-term money market instruments such as certificates of deposits, treasury bills, term deposits, commercial papers and so on to provide liquidity to the investor. If you’re looking to park surplus money for the short run or create an emergency fund, investing in liquid funds can be an ideal option.

 

What You Need To Know Before Investing In A Mutual Fund

 

Consider the following factors if you are a first-time investor in mutual funds.

 

  • Establish a financial goal. When you invest in a fund scheme, have a specific investment goal in mind. Make a list of your financial goals, budget and time horizon to achieve your objectives. Knowing these three areas of your investment personality can help you ascertain the amount you need to invest every month through a systematic investment plan in mutual funds to meet your goals.
  • Decide your investment profile carefully. Since there is a wide range of mutual fund types and categories, it is vital to select a fund type that can help you reach your personalized goals.
  • Look into five-year past performance. While past performance is essential before investing in a mutual fund, it is not the only benchmark. That’s because short-term past performance, such as one-year returns, may only reveal reasonable returns in the short run but not for the long term. An excellent way to look into a mutual funds steadiness is to review its performance for the past five years or more. Other essential factors to consider, include the fund’s total expense ratio, the management’s record, and the AMC’s history.
  • Speak to a financial professional. Given the wide variety of mutual funds in the market, it can be challenging for you to select the ones that fit your unique needs. To help you know the right fund types for your objectives, you may want to consult an expert financial advisor who can help you choose the funds based on your finances and goals.

 

How to Start Investing in Mutual Funds?

 

If you are a new fund investor, here is a simple and easy process to begin.

  • Visit ICICI Direct
  • Complete your e-KYC [Know Your Customer] formalities
  • Fill in the necessary details as requested
  • Choose the mutual funds you wish to invest based on your financial objectives
  • Determine the fund and transfer the amount
  • For SIPs, issue a standing instruction with your bank for the periodic transfers

Conclusion

Investing in mutual funds can be an excellent way of investing in a diversified portfolio of securities. They are simple to understand and offer flexibility. Besides, active mutual funds are managed by professional fund managers who take care of the portfolio on your behalf. However, carefully review the fund’s prospectus to understand its risks before investing. 

If you’re looking for a convenient and clear way of investing and managing your personal finances, it’s time to invest through ICICI Direct

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. 

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