Investing in mutual funds is a smart and accessible way for individuals to grow their wealth over time. It offers diversification, professional management, and a broad range of options for different investment goals.
In this article, we will guide you through the process of investing in mutual funds, from understanding the basics to making informed decisions.
On one hand, where COVID-19 took away jobs from thousands of people, on the other hand, there has been a surge in the enthusiasm for online investment and online earning.
Today, who doesn’t know about the stock market? While there was a time when people used to equate the stock market with gambling, if you understand the stock market, you must have heard about mutual funds at some point.
What is Mutual Fund?
If you are not familiar with the stock market, you can read about it by clicking here.
In simple terms, a mutual fund is just one part of the equity market where our money is managed by someone else. The most significant advantage of mutual funds is that you can start with a monthly investment of as little as 100 rupees. Mutual funds often provide returns of around 12 to 15% over the long term.
Mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. This pooling of resources allows investors to benefit from professional management and reduce individual risk.
What are the benefit for investing in mutual fund?
Investing in Mutual Funds offers several benefits, including:
- Diversification: Mutual funds pool money from multiple investors and invest in a diversified portfolio of stocks, bonds, or other securities. This diversification helps spread risk and can lead to more stable returns.
- Professional Management: Expert fund managers make investment decisions on behalf of investors, ensuring that the portfolio is managed efficiently.
- Affordability: Mutual funds allow small investors to participate in the financial markets with relatively low initial investments, making them accessible to a wide range of people.
- Liquidity: Most mutual funds offer high liquidity, allowing investors to buy or sell their units on any business day, providing flexibility and ease of access to their investments.
- Transparency: Mutual funds provide regular updates on the fund’s performance, holdings, and expenses, ensuring transparency for investors.
- Flexibility: Investors can choose from a wide range of mutual fund types to match their investment goals and risk tolerance.
- Risk Reduction: Through diversification, mutual funds help reduce the impact of poor performance in a single security, spreading risk across various assets.
- Historical Performance: Investors can review the historical performance of mutual funds to assess their track record and make informed investment decisions.
- Tax Efficiency: Some mutual funds offer tax benefits, such as tax-saving equity-linked savings schemes (ELSS), helping investors save on taxes.
- Ease of Investment: Opening an account and investing in mutual funds is straightforward and can be done through various platforms, including online investment portals and mobile apps.
These benefits make mutual funds a popular choice for individuals looking to invest in the financial markets while minimizing risk and taking advantage of professional management.
Types of mutual fund
There are several types of mutual funds available to cater to various investment goals and risk preferences. Some of the common types of mutual funds include:
- Equity Funds: These funds primarily invest in stocks, providing the potential for high returns but also carrying a higher level of risk. Equity funds can focus on different market segments, such as large-cap, mid-cap, or small-cap stocks.
- Debt Funds: Debt funds predominantly invest in fixed-income securities like bonds and government securities. They are considered less risky than equity funds and offer regular income in the form of interest.
- Hybrid Funds: Hybrid funds, also known as balanced funds, combine both equity and debt investments. These funds aim to provide a balance between potential returns and risk, making them suitable for investors seeking a mix of safety and growth.
- Index Funds: Index funds replicate a specific market index, such as the S&P 500 or Nifty 50. They aim to match the performance of the chosen index by investing in the same stocks in the same proportion. Index funds typically have lower expenses compared to actively managed funds.
- Tax-Saving Funds (ELSS): Equity-Linked Savings Schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act. These funds primarily invest in equities and come with a lock-in period.
- Liquid Funds: Liquid funds invest in very short-term debt instruments and offer high liquidity. They are suitable for parking surplus funds and are often used by businesses for short-term cash management.
- Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges like individual stocks.
Each type of mutual fund serves a different purpose, and investors should choose the one that aligns with their financial goals, risk tolerance, and investment horizon.
How to choose right mutual fund?
Selecting the right mutual fund is a crucial step in building a successful investment portfolio. Here’s a guide on how to choose the right mutual fund:
- Define Your Financial Goals: Start by identifying your investment objectives. Are you saving for retirement, a home, or your child’s education? Different goals may require different types of funds.
- Assess Your Risk Tolerance: Understand your risk tolerance. High-risk investments can offer higher returns but come with greater volatility.
- Research and Analysis: Conduct thorough research on the mutual funds available in the market.
- Historical Performance: Review the historical performance of the funds you are considering. While past performance is not indicative of future results, it can provide insights into a fund’s track record.
- Fund Manager Expertise: Evaluate the experience and track record of the fund manager. An experienced manager is more likely to make informed investment decisions.
- Fund Size: While larger funds may offer stability, very large funds might find it challenging to generate high returns due to limitations on investment options.
- Diversification: Ensure that the fund provides adequate diversification to reduce risk. A well-diversified portfolio can help mitigate the impact of poor performance in individual securities.
- Investment Horizon: Consider your investment horizon. Different funds are suitable for short-term or long-term investments. Choose a fund that matches your time frame.
- Benchmark Comparison: Compare the fund’s performance against a relevant benchmark index. A fund that consistently outperforms its benchmark may be a good choice.
- Fund House Reputation: Consider the reputation and credibility of the mutual fund house. Reputable fund houses often adhere to better investment practices.
Choosing the right mutual fund involves a careful evaluation of your financial goals, risk tolerance, and the specific characteristics of the funds available in the market.
How to start investing in mutual fund in 2024
Investing in mutual funds is a straightforward process. To begin, you’ll need a Demat account. If you don’t have one, you can open a Demat account at your nearest bank or even online. If you’d like a recommendation, ICICI Direct and HDFC Securities are good options.
Once your Demat account is open, you will receive a user ID and password, which you can use to log in to your trading account. Once you’re logged in, investing in mutual funds becomes quite easy. Here’s a step-by-step guide:
- KYC (Know Your Customer): Ensure your KYC is completed. You will need to submit your identity and address proof, PAN card, and a passport-sized photograph.
- Select the Fund House: Choose the mutual fund house you want to invest in. There are several to choose from, each offering a variety of funds.
- Select the Mutual Fund: Pick the specific mutual fund scheme that matches your investment goals and risk tolerance.
- Investment Amount: Decide how much you want to invest. You can usually start with a relatively small amount, such as 100 rupees.
- Choose the Investment Option: Decide between the “Lump Sum” or “SIP” (Systematic Investment Plan) mode. Lump Sum means investing a one-time amount, while SIP involves regular, periodic investments.
- Payment: Link your bank account to your trading account for seamless transactions.
- Place the Order: Once all details are filled out, place the order for the mutual fund units you wish to purchase.
- Monitor Your Investment: After investing, regularly monitor the performance of your mutual fund. Most trading accounts offer features to track your investment’s progress.
Remember that investing in mutual funds carries some risk, and it’s important to do your research, consult with a financial advisor if needed, and stay informed about your investments.
Conclusion:
Investing in mutual funds can be a rewarding journey towards achieving your financial goals. It’s crucial to research, understand your risk tolerance, and make informed decisions. By following these steps and remaining vigilant, you can harness the power of mutual funds to grow your wealth.
