Are you confused about how to invest in a Mutual Fund?
Mutual Fund is one of the best investment avenues, but if you are a beginner, then you might be confused with complex terminologies and processes just like stock investment.
However, once you understand the process, you would find it quite easy.
This article will help you understand how to invest in mutual funds in India along with important terminologies that will help you understand the mutual fund investment jargon.
You will also learn on how to invest in a mutual fund directly without depending on the intermediaries. Let’s dig deep on how to invest in mutual funds in India.
How To Invest In Mutual Funds In India
#1. Define Your Investment Goal
When you know your goal, it is quite easy for you to determine various parameters while selecting the mutual funds.
You can consider the factors below while defining your investment goal –
#1. Purpose of Investment
You must have clarity for what purpose you are investing in mutual funds. It could be your child’s higher education, or your retirement corpus or buying your own home or it could be for your marriage after one year.
#2. Tenure of Investment
Your investment tenure depends on the purpose of your investment.
For example, if you are investing for retirement purposes, your tenure could be long, say, 25 to 30 years depending on your current age.
On the other hand, if you are investing for a short term goal like your marriage which is expected after one and half years, your tenure would be short around 18 to 20 months.
#3. Expected Returns
Mutual funds return depends on how much risk you take. If you take high risk and purely invest in stocks, then you can expect higher returns whereas if you invest in low risk-oriented funds that invest in government securities, you get lower returns.
The best method is the longer the tenure, the more risk you can take. If the tenure is below 5 years, invest where risk is low.
#2. Types of Mutual Funds
#1. Equity Funds
Equity Funds are those mutual funds that invest your money in equities or, in simple words, stocks of different companies.
Equity funds generate higher returns as compared to other mutual funds over longer periods of time.
But if you are investing for a short period of time, then equity funds may be risky because of volatility of the stock prices.
#2. Debt Funds
Debt funds invest in government bonds, corporate debentures and other debt instruments.
You get low returns as compared to equity funds, however, you may get better returns than a savings account or fixed deposit interest depending on the performance of the funds.
They are less risky if invested for short term because of less volatility of debt instruments.
#3. Hybrid Funds
Hybrid or Balanced funds provide you higher returns with moderate risks as your money is invested in around 70%-75% in equities and the rest of the amount in debt securities.
Such funds are ideal for you if you want to get better returns along with balancing out the risk by investing a part of your investment in debt instruments.
#4. ELSS Funds
If you want to save tax but not interested in typical tax saving instruments such as ULIPs, then ELSS funds are the best option for you.
They not only provide you much better returns over ULIPS or other insurance plans, but also help you save taxes under Section 80C of the Income Tax Act.
You can save upto Rs. 1.50 lakh under section 80c.
#3. Investing in Mutual Funds
#1. LumpSum vs SIP Mode
In lumpsum mode, you invest your principal amount in your selected mutual funds in one go whereas in SIP mode (Systematic Investment Plan), a specific amount gets deducted from your savings account and is invested in your selected funds on a monthly basis.
You should go for SIP especially if you are a beginner and don’t know much about stock market ups and downs.
Why? Let me explain to you with an example.
Suppose, you buy 500 units of HDFC fund with per unit NAV value of Rs. 100, means you have lumpsum invested Rs. 50,000 in HDFC mutual fund.
Now if the market crashes after your investment and the NAV value of your fund reduces to Rs. 90, you will be at a loss of Rs. 5,000 in the very first month that could be heartbreaking for you.
On the other hand, if you invest a SIP of Rs. 4500 per month (45 units x Rs. 100) that could let you invest (4500 x 12) = Rs. 54,000 in one year in the same mutual fund.
Now when you invest Rs. 4,500 in the first month and market crashes resulting into the revised NAV value of Rs. 90, your loss would be (45 units x Rs. 90 = 4050) a loss of Rs. 450 only.
Then in the next month, when you invest the second installment of SIP, you would be able to buy more units due to lesser cost of mutual funds units. Your calculator would look like this –
Rs. 4500/ Rs. 90 = 50 units.
That means you would be able to buy 5 more units that would be beneficial when the mutual fund again comes to its original price or increases further, you would get the benefit of correction.
On the contrary, if you buy at a lower price in the first month of SIP, and the price increases in the second month, again you would have bought more units because of the lesser price in the first month.
Ultimately, SIP helps you balance out any risk of loss by reducing your average cost.
#2. Direct vs Regular
Mutual funds have 2 types of plans – Direct or Regular.
Direct plans are like “Do-it-yourself” plans where you invest directly into the fund and do rest of the activities such as tracking of fund performance, switching or rebalancing the funds yourself which may be tough for a beginner.
On the other hand, in regular plans, you invest through an intermediary who does the work for you and gets commission in return.
Direct funds provide you better returns as you save money by avoiding paying commissions to distributors if you don’t mind doing your work yourself.
Some facilitator portals like Zerodha allow you to directly invest through their portal if you open demat account with them.
Let me show you how to invest in Direct mutual funds online.
For example, if you want to invest in HDFC Equity fund directly, you have to follow the steps given below.
Step 1. Go to hdfcfund.com website. Select the required category for example “wealth creation” as shown below.
Step 2. Now select a particular fund and click on “Explore & Invest”. (See the image below)
Step 3. Now click on “Invest Now”.
You’ll see a popup screen and choose the required option, lets say if you are a new investor visiting for the first time to hdfc fund website, then click on “New Investor”.
Step 4. In the new page, you can click on “New Investor” tab in the left column and fill details on rightside colum and click on “Register Now”
Step 5. Once you have completed the registration process, you can start investing the desired amount in mutual funds.
Now you have learnt about how to invest in mutual funds at hdfc portal. You can similarly visit any fund house (AMC) portal and start investing.
Important Things to Remember before Investing in Mutual Funds
#1. AMC (Asset Management Company)
AMC or Asset Management Company manages the money of individuals by investing in several asset classes like stocks, bonds.
#2. AUM (Asset Under Management)
Asset Under Management is the total sum of investors invested in a particular Mutual Fund. In other words, AUM is the total size of assets that an AMC manages for its investor that includes the overall market value that the fund is holding.
The larger AUM value depicts higher trust of investors and better performance of the AMC.
#3. NAV (Net Asset Value)
Just like the share price for the stocks, mutual funds have NAV. NAV reflects the price of a mutual fund.
You can gauge the NAV over a period of time to track the performance of a particular mutual fund.
#4. Dividend Option
Mutual funds have two types of returns one is Dividend and other is Capital Appreciation or Growth.
When you select the “Dividend” option, you get whatever gains the mutual fund earns as intermediate payments in the form of dividends
#5. Growth (Capital Appreciation)
Unlike the dividend option, in Growth, all the interest, bonuses, are added back and re-invested in the mutual fund scheme. You don’t get any intermediate dividends during the invested period.
Growth is a stable option for wealth creation as you can enjoy the benefits of compounding effect over larger periods of time.
Mutual Funds are among the great investment options that are ideal for both beginner as well as an expert.
However, I would like to advise you to learn to analyse the mutual fund performance and when to enter and exit from a fund scheme, to get the optimum benefit.
If you are still not confident, then you can also consult a financial advisor before jumping into the investment rather burning your hands without any knowledge.
Investing with proper planning will help you take the benefits of mutual funds for wealth creation.