How to Invest in Mutual Funds?

What is a Mutual Fund?

Mutual funds are like a pool of money collected from many people who have a similar goal of investing. This money is then managed by professionals called fund managers who decide where to invest it. The advantage for individual investors is that they do not have to worry about selecting and managing investments themselves. Mutual funds offer a diverse mix of investments, such as bonds, stocks, and debentures, to help balance the risks and potential returns. The income earned from these investments is distributed among the investors based on how much money they have put into the fund. So, it is a way for busy individuals to invest their money and potentially earn returns without having to actively manage their investments.

How to invest in Mutual Funds?

Investing in mutual funds can be done by following a simple method:

Understand your investor profile: Determine your risk tolerance level and investment goals. This will help you decide how much money you can invest and choose a mutual fund that aligns with your profile.

Choose the right mutual fund: Select a mutual fund category based on your investment objectives, such as equity, debt, or hybrid funds. Within each category, consider factors like the fund's track record, performance in different market conditions, and expense ratio. Decide whether you prefer value investing or growth investing and pick the appropriate mutual funds accordingly.

Set a suitable investment duration: Determine how long you plan to invest. Longer timeframes generally offer higher returns but also involve higher risks. Have a specific financial goal in mind to help guide your investment decisions. Compared to fixed deposits (FDs) and Public Provident Fund (PPF), mutual funds are often a wiser choice.

Monitor and rebalance your portfolio: Regularly keep track of your investments and adjust as needed. Rebalancing involves selling underperforming investments and adjusting your portfolio to maintain your desired asset allocation and risk exposure.

In simple terms, investing in mutual funds involves understanding your risk tolerance and goals, choosing the right mutual fund category and funds, investing for a specific duration, and regularly monitoring and adjusting your portfolio to stay on track.

Investing in mutual funds

KYC (Know Your Customer) is a process where investors provide certain documents to mutual fund companies to verify their identity and evaluate their eligibility to invest. The documents typically include a filled form, PAN card (Permanent Account Number), and proof of identity and address such as Aadhar card, Passport, Voter's card, or Driver's license.

Completing the central KYC (CKYC) process means that you only need to submit these documents once, and they will be valid for all your future mutual fund investments. Many mutual fund companies assist investors in completing the CKYC process when they invest through them.

Once your KYC is done, you can easily invest in mutual funds online and set up a systematic investment plan (SIP). With an SIP, you authorize the mutual fund company to automatically debit a fixed amount from your savings account at regular intervals (such as monthly, quarterly, or bi-weekly) and invest it in mutual funds. This allows you to invest regularly and systematically without the need for manual transactions.

In summary, digitization has made investing in mutual funds convenient, as you can complete the KYC process online and open a mutual fund account quickly. You don't need a Demat account to invest in mutual funds. Once your KYC is done, you can start investing through SIP, where a fixed amount is automatically debited from your savings account and invested in mutual funds at regular intervals.

TYPES OF MUTUAL FUNDS

Here is a brief explanation of popular types of mutual fund (MF) schemes: -

Equity funds: These MFs invest in company stocks/shares, carrying higher risk and potential returns depending on the market performance.

Debt funds: They invest in bonds, debentures, and government securities, providing a lower-risk option for investors with assured earnings.

Money market funds: These funds invest in liquid and short-term investments like Treasury bills and commercial papers, suitable for parking surplus funds for moderate returns.

Index funds: They invest in securities that mirror a specific market index, aiming to generate similar returns to the index.

Income funds: Income fund MFs invest in income-generating instruments such as bonds and debentures, offering a fixed income source for investors.

Speciality funds: These mutual funds focus on specific sectors and market segments to generate higher returns.

Balanced or hybrid funds: These funds invest in a mix of asset classes to achieve a balanced risk-return profile.

Fund of funds: These MFs invest in other mutual funds and their performance determines the return. They are also known as multi-manager funds.

Tax-saving funds (ELSS): These schemes invest in equities and stocks that qualify for tax benefits.

Pension funds: Pension funds aim to generate a regular income stream for investors after retirement by investing in shares and fixed-income funds.

Fixed maturity funds: These funds invest in debt and money market instruments with a fixed tenure.

Exchange-traded funds (ETFs): ETFs are traded on stock exchanges like individual stocks but are composed of a combination of investments, like mutual funds.

 

Advantages of Mutual Funds

Here are the advantages of investing in mutual funds: -

Diversification: Mutual funds provide instant diversification by investing in a variety of assets, reducing the risk associated with investing in a single company or security.

Liquidity: Open-ended mutual funds offer high liquidity, meaning you can easily buy or sell your investment through a registered stockbroker.

Customizability: Mutual funds can be customized to suit your investment goals and risk tolerance levels.

Safety and Transparency: Mutual funds are regulated by SEBI and other bodies, making the investment process secure and transparent. They are also color-coded to indicate the level of risk associated with the fund.

Cost-Effective: Investing in mutual funds is generally more cost-effective compared to buying individual stocks, as you don't need to pay transaction fees for every trade.

Tax Savings: Certain mutual funds, such as ELSS funds, offer tax benefits under section 80C of the Income Tax Act, allowing you to save on taxes.

Lower Lock-in: Some mutual funds, like ELSS funds, have a lock-in period of three years, which is shorter compared to other investment options. Additionally, there are no penalties for early withdrawal with mutual funds.

Advantage of SIP: Systematic Investment Plan (SIP) allows you to invest regularly and take advantage of rupee cost averaging. This means you accumulate more units when prices are lower and fewer units when prices are higher, helping to average out the cost over time.

No Need to Time the Market: With mutual funds, you do not have to worry about timing the market. You can invest anytime, regardless of market conditions, and benefit from rupee cost averaging.

Well-Regulated: Mutual funds are regulated by SEBI, RBI, and AMFI, ensuring investor protection and making them a safer investment option compared to other alternatives.

Conclusion:

Mutual funds are a popular investment option that allows people to pool their money together and have it managed by professionals called fund managers. The advantages of mutual funds are that they provide diversification, meaning your money is spread across different types of investments to reduce risk. Additionally, mutual funds give individuals the opportunity to potentially earn high returns without needing a large amount of money to start with. For fund managers, mutual funds can be a way to generate income because they charge fees for managing the fund. These fees are typically a percentage of the total amount of money invested in the fund. So, as the fund grows and attracts more investors, the fund manager's income can also increase.

Mutual Fund Service at Libord:

Libord Brokerage Private is one of the leading brokering companies that allows people to easily invest in mutual funds. Mutual funds are investment options where your money is pooled with other investors and managed by professionals. We offer a platform where you can invest in mutual funds directly, which means you can save money on fees and potentially earn higher returns. We also have a website and a mobile app where you can choose from plenty of mutual funds and invest either a fixed amount regularly or a lump sum. We also help our customers switch from regular mutual funds to direct mutual funds, which can give them extra returns.