Complete Guide for Beginners to Invest in Mutual Fund

How to invest in mutual fund?

Among many tax savings and wealth creation plans, mutual funds is most talked about in the market for its flexibility and wide ranging category to meet diverse set of requirements from various types of investors.

Mutual funds are regulated by the Association of Mutual Funds in India (AMFI). Mutual funds are professionally managed investment plans in which money from various investors is mutually accumulated by an Asset Management Company (AMC) and invested in wide category of financial tools that includes – equity, debts, stocks and securities. The profit generated from the same is then given back to the investors as capital gain or dividends after deduction by the Asset Management Companies (AMC). Over a period of time, mutual funds have grown successfully and have been accepted by the people with open mindedness, ignoring the risk factor associated with it. There are wide ranging mutual funds available in the market. You should do a proper study of the company that will manage your funds before deciding to invest in any. Additionally, the risk taking capacity of the investor is very important. So do take the risk taking capacity factor into consideration while planning for mutual fund investments.

If creating wealth is your sole motive for whatever reason you might have chosen, then mutual funds investments are one of the most popular investment options to create wealth today. The beginners who have just started investing have made mutual funds their first choice for their risk taking capacity and also for the reason that they want to get exposure of the financial market. Mutuals funds are a collection of stocks, securities and bonds managed by professionals. So, when you plan to start investing in mutual funds, make sure you are aware of these steps – Why you want to invest? The purpose of your investment plans, keeping important documents within reach and also understand what is the right mutual fund for you. Selecting the right scheme is very important.

Apart from all this, the beginners should go through the important points shared below deciding to invest in mutual funds. These points can make their investment process easier and also help them select the right scheme. So some of the points are here:

Why you want to invest in Mutual Funds?

Anjaneya Gautam - National Head, Mutual Funds, Bajaj Capital suggests, “Always decide the purpose of saving and year when you need your money back. This will help in filtering various mutual fund options basis – risk level, lock-in period, payment method, etc”

The purpose of doing anything is very important to succeed. Without purpose you can’t take right decision or choose right path to achieve your goals. Similarly, the purpose of investing in mutual funds too is important. It should be well defined – building a home, saving for studies of children, wedding plans or savings for retirement, etc. However if you do not have any goal, then at least know how much financial risk you can handle and how much wealth you are planning to create in a particular time period.

Important Documents Should Be Within Reach to invest in Mutual Fund

We know every time we do such investment we need to submit few necessary personal details and for that we need documents like – date of birth certificates, address proof, photograph, your PAN card and the recent and another compulsory documents added recently to the list is Aadhaar cards (do check with your funds manager for this). Every important task should be well documented and even mutual funds demand the same for your own convenience and for the policy approvals these are the basic requirements by any investment company. You will also require becoming KYC compliant as one of the first to start with after you fill the form for the respective scheme in which you have planned to invest. PAN card is compulsory for you to be qualified for mutual fund investments. If you possess an Aadhaar card then it will be easier to create folio/account through easy, simple and paperless e-KYC, otherwise you can go for one time paper KYC process.

Do Not Ignore the Risk Factors Associated with Mutual Funds

For the beginners, it is very important to know that there are several types of mutual funds available in the Indian investment market for all kinds of investors to meet the diverse investment requirements and risk taking capacity. While purchasing mutual funds you should be careful of selecting schemes based on your risk handling capacity. Always keep this in your memory that higher the returns high are the risks. Means the more returns you expect from the investments, more risks are associated to them. You have all kinds of options in mutual funds and there is no expectation that can’t be met. Choose your schemes wisely as it your money that you will have to invest, it is you who wil have to bear the risks (if any unfortunately) and it is your future too.

How Do You Select Your Mutual Fund Investment Plans?

If we follow the advice of experts then investments should have long term financial goals and not short terms. It is understood that financial services are not easy for everyone to understand but whatever be the case, investments and savings are one of the most important tasks that one should do without a second thought for a better and secure future. So, when you face problem, it is advisable to take advice from qualified mutual fund advisors. You explain them your requirements, based on which advisors will list down the investment schemes as per your financial goals. You can choose from debt, liquid, hybrid or equity schemes and pick dividend payout, growth or reinvestment options, all as per your plans and needs. Then you can also choose to pay through SIP, STP, SWP or one time payment (Lumpsum), etc. strategies, based on your risk taking capacity.

Past performance of Mutual Funds is not Always their Future Performance

Not always does same plan gives you benefits. Sectors which are flourishing now may not be so much flourishing in coming few years or may even flourish more than you expect. Based on where your fund is invested all the returns depend. In case of mutual funds past performance of funds is not always their future performance. Do not look how the funds performed in the past. Sectors like IT and Pharma were doing wonderful few years back and their good performance continued for almost a decade but what we see now they have reached a saturation level now and their performance is not so good in the last couple of years.

But again, be careful, this is not at all the way of judging mutual funds returns. You may not know their performance might improve in the coming years. The general understanding is, the funds that have earned good returns in the past are the best bets to start with when you plan to invest in mutual funds. Mostly, the funds that have performed well in the past is more likely to perform well in the future too when we compare them with fund that has history of non performance. If a funds continues to perform well then it is believed to be a great fund, but investors must do a study how funds perform over various market cycles. The returns you get tell everything. It also tell how good your fund manager is during the bad and critical phases.

How to select Mutual Funds Schemes?

Dividend or Growth – what option should you select? It becomes very important when you are making decisions about your investment plans. So what is it and how does it help you in your financial goal. Go for dividend options if you want profits coming to you from time to time whenever the company makes profit from the market, and opt for growth option if you want to meet big goals that may require huge capital.

Option you select should be based on how frequently you want your money. There are mutual funds schemes that distribute their profits in the form of dividends from time to time to the shareholders of the schemes and there are others that use the profits to reinvest further in company’s growth, investing on which gives returns after a long time gap and not on intervals.

Your age too matters when you make the choice to invest in Mutual Funds

This is one of the major advices, which you should not miss. Though there isn’t any strict rule to follow but the reason is as you grow older and your retirement age comes closer you risk taking capacity reduces. Therefore, expert's advice to people closer to retirement age is not to engage in stock markets and prefer to save your capital. One should keep a check on the term plans of the schemes while making decisions on investment goals. That is the time period when you will require investing. Moreover, individual interest to take risk is very important but then it should not affect your finances.

Always Keep The Costs Low

Last but not the least is to keep the costs low. Every mutual fund in India has two types of plans – Direct and Regular. Direct – which you purchase directly from the company and there is no commission paid to the middle man or bank and Regular – in which you have to pay commissions to the bank or advisor out of your investments/profits. We recommend you to choose the direct plans as the money that goes in commission is added to your wealth. This means more money for you.