How to invest in mutual funds?

Gaurav Seth
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Gaurav Seth

Steps To Invest in Mutual Funds in India?

Mutual Funds are formed when many investors pool their money for the purpose of investing in shares of companies, bonds, or even gold. Even though the units of a Mutual Fund are generally owned by a large number of investors, the pooled money is managed by a professional fund manager. The fund manager is someone who has the experience and  knowledge in investing and is expected to generate the best returns from the investments.

Investing through mutual funds is one of the most convenient and popular ways to grow one’s capital. There are Rs. 23.93 lac crores of Asset Under management through 44 AMFI registered AMCs as of April 2020. The Indian mutual fund industry is eyeing 100 lac crores of AUMs with the investor base rising to 10 crore by 2030 according to the AMFI-BCG vision document.

Returns from mutual fund investments vary across different schemes, asset classes, and risk characteristics. If done right, it has the potential to generate higher returns or income for investors over a long period of time.

In this article, we will highlight some points which will help you in investing in mutual funds. These are:

KYC Requirements

Investing in a mutual fund requires the mandatory compliance of the investor with KYC under the Prevention of Money Laundering Act, 2002, and rules framed by SEBI. It is simply the verification of the legal identification of the customers or clients when opening an account with financial entities. The compliance to KYC is a one time process. Once done it allows individuals to make any transactions in the financial markets and with different financial entities.

An investor can complete the KYC process through any registered broker, AMFI distributors, a financial advisor, or by visiting any AMC, KRAs office. The KYC information is centrally held with the KYC Registration Agencies (KRA) such as CAMS, Karvy, NSDL, etc. which maintains the information records of the clients & their KYC status. 

The investors can conduct the KYC process offline as well as online. The KYC process requires demographic, occupation details, bank account details along with the mandatory self-attested copies of pan card, ID proof, address proof & a passport size photograph.

Also Read: How to do KYC for Mutual Funds Instant?

Understanding Types of Mutual Funds

Investing in mutual funds requires at least a basic understanding of the types of mutual funds available in the market. The mutual fund schemes allocate their corpus of assets in a particular asset class, within sub-categories of the asset class, or can also invest across different asset classes depending upon the investment objective of the scheme.

One should choose a mutual fund as per his risk appetite and financial goals.

The 3 main types of mutual funds include:

1. Equity-Oriented Mutual Funds

Equity mutual funds are the funds that invest predominantly in the stocks of publicly listed companies. They can either be actively or passively managed. Along with the styles of investments, equity mutual funds also include a variety of schemes based on the classifications of equity securities such as market capitalization, sector, and themes.

These funds have the potential to generate high capital appreciation over a period of time.

2. Debt-Oriented Mutual Funds

Debt mutual funds are those mutual funds that invest a major portion of the fund assets in fixed-income securities like government securities, debentures, corporate bonds, and other money-market instruments.

The debt-oriented funds generally carry low risks and are less volatile compared to equity mutual funds.

These funds are suitable for earning stable returns in the portfolio

3. Hybrid Mutual Funds

Hybrid mutual funds are those mutual fund schemes which aim to provide stability along with the capital appreciation of investment through diversifying its corpus into an investment mix of equity, debt, and other assets.

Read More: Important Tips for Mutual Fund Investment

Returns from Mutual Funds

Investments in mutual funds can help the investors realize their financial goals by generating high returns from the investments. But the returns from mutual funds vary across the different mutual fund schemes and market conditions.

Investors can expect to get higher returns in equity mutual funds than debt funds because of the higher risk involved.

Debt Funds currently provide returns in the range of 5-9% depending upon the category selected for investment.

Equity Mutual Funds can provide returns of around 10-15% over a considerable period of 5 years & above given the favorable conditions in the market. The funds may generate extraordinary returns in times of high growth.

Hybrid Funds normally provide returns in the range of 5-12% depending upon the selected category for investment. For example- Arbitrage funds in the hybrid category generally provide stable returns of approximately 5 to 6% p.a, however, they are very low on risk. On the other hand, dynamic asset allocation funds in the hybrid category of mutual funds have the potential to generate even higher returns than equity funds as they have the flexibility to switch between asset classes depending upon market conditions.

The returns from mutual funds depend upon a number of factors. Some of them are: 

1. Market conditions

The mutual funds schemes get directly impacted by the conditions prevailing in the market. Any unfavorable conditions in the market leading to issues in business operations can affect the valuations of the holdings in the portfolio of equity mutual funds.

Also, Stressed business entities’ corporate or public sector may experience a fall in the credit ratings of the company, which will eventually make the debt securities issued by them less credible in investment. 

2. Sectoral Impacts

A high favorable environment & incentives for a particular sector can lead to higher valuations of the companies present in the sector. Mutual funds holding the securities of the companies in that sector can experience high returns. The same is true for otherwise.

3. Government Policy Changes

Changes in government policies, taxation, regulations, and interest rates in the economy can have a large impact on the holding companies of the mutual fund. If the change is favorable for the businesses, there will be a rise in the valuations leading to generating higher income from mutual funds for investors.

4. Business Outlook

A strong business outlook for business or the economy will be reflected in the rising valuations of the stocks. This will lead to higher returns for the investors. In case of a weak business outlook, the opposite would be true.

Read More: National Pension Scheme- A beginner’s guide for rules and benefits

Losses in Mutual Funds

Risk is an inherent part of every investment. Higher the risk, the higher the rewards only with the higher possibility of losses. The mutual fund schemes do not guarantee for the returns they will provide or whether they will achieve the objective or not. 

So, it would be wise for investors to choose & make their investment decisions carefully. The possibility of losses in mutual funds can always be reduced by choosing funds with low-risk characteristics.

Sometimes the losses may arise from your wrong choices or can be a result of changes that happened after your investments. This will require you to make reconstitutions (existing or fresh investments) in your portfolio of the funds. Also, one should periodically review and rebalance his portfolio if required.

Making a portfolio of funds suitable to your risk appetite and financial goals can help to face associated risks well.

How to Choose the right mutual fund?

Choosing the right mutual fund is very important for the investor. An attention on the following points will help the investor to choose the right fund:

  1. The investors can check the current rankings of the Mutual fund schemes based on the returns they offer.
  2. Past performance needs to be analyzed for the funds which will help to see the consistency of the returns.
  3. Attention to the expense ratio of the fund is very important. Higher expense ratio of a fund would result in lower after-fees returns of the funds. Investors can also compare the expense ratios with its peers to make the choices.
  4. Duration of the fund- Duration refers to the sensitivity of the fund’s underlying bonds to the interest rate changes. The funds with longer durations are impacted by the movements in interest rates.
  5. It is important to check the Tax saving benefits associated with the fund if done for tax purposes. Only the ELSS category of mutual funds offer tax benefits to the investors under section 80C.
  6. The investors can compare the Fund’s performance over the years against its Benchmark to see how much alpha the fund has generated.
  7. Knowing about the experience of a fund manager in managing the investments is also a crucial part while choosing the funds.

Read More: How to select the best Mutual Fund ?

Rules of Mutual Funds

Some golden rules that will guide you in your mutual fund investments are:

1. Having Patience

Wealth cannot be created over a short period, it takes a long time to create wealth. The ones who have the patience to see their investments growing slowly can achieve their financial goals.

Sometimes, the investors exit from their mutual fund investments just because they were not getting any positive returns for some time. But this is not right as the poor performance of the fund can be a result of temporary factors that may dissolve after some time and then later generate positive returns.

So one of the important rules of mutual funds is having patience.

2. Investing as per risk appetite

Another important rule of mutual funds is to make the investments as per the risk tolerance of an individual. Risk tolerance can depend upon a number of factors like age, marital status, financial goals, expenses, income, investment horizon & others.

Investing in high-risk funds without having the tolerance to bear the losses that may arise, can have a serious effect on the financial position of the investor.

It is important one should invest as per his risk profile.

3. Diversification not over-diversification

Diversification is a very important part of an investment. An investor should always try to diversify into different funds as well as different asset classes. As it helps to reduce the volatility in the portfolio by reducing the down-side risks involved with a particular fund. 

But there should not be over-diversification i.e the investors should not invest in too many funds as having investment in a large number of funds will make the portfolio review & tracking of the funds difficult for them. Along with that it might not be fruitful as too much diversification will not provide high returns.

Methods for Investing in Mutual Funds

There are two ways to make investments in mutual funds. Each has its own advantages and disadvantages, one can choose the option which is suitable to his needs & finances.

1. Lump-sum Investment

A lump-sum investment in mutual funds is a single payment or a one-time bulk payment made for investment in a scheme. 

This is suitable when you have a large idle amount to invest and a long investment horizon to grow your money.

2. Systematic Investment Plan(SIP)

A systematic investment plan (SIP) is a plan where investors make regular and fixed investments into a mutual fund every week, month, quarter or as specified. SIPs allow investors to save regularly and in a disciplined manner with a smaller amount of money while benefiting from the long-term advantages of Rupee-cost averaging. This way, an investor gets the opportunity to invest at times when prices are low which reduces the overall cost of investment and hence produces good returns for the investors over a long period.

The investors can start with SIP in mutual funds for as low as Rs.100.

Top Asset Management Companies in India

There are a total of 44 asset management companies in India offering a variety of mutual fund schemes with different risk-return characteristics. Some of the top AMCs are:

  1. HDFC Mutual Fund
  2. ICICI Prudential AMC
  3. SBI Mutual Fund
  4. Aditya Birla Sun Life Mutual Fund
  5. Nippon India Mutual fund

Frequently Asked Questions (FAQs)

1. What is KYC in mutual funds?

The KYC or Know Your Customer is simply a verification process of the legal identity of the investor or customer while opening an account with any entity.

2. What are the types of mutual funds?

The three broad categories of mutual funds are equity mutual funds, debt mutual funds, and hybrid mutual funds. Investors can look into putting money in different sub-categories of these mutual funds as per their requirements, risk profile & financial goals. 

3. What are the returns in mutual funds?

The returns in mutual funds vary across categories, & different fund houses. Different categories of mutual funds have different potential return characteristics.

4. How to select the right mutual funds?

The right mutual funds for your mutual fund portfolio can be selected after considering different factors like past performance, duration, risk-return characteristics, rankings, taxation, portfolio, etc. of the mutual fund schemes offered by different fund houses. Also, it is important to consider your investment horizon, financial goals & risk profile before putting any money in mutual funds. Reach out to your financial advisor who can help you out with selecting the best schemes as per requirements.

5. What are the ways to invest in mutual funds?

There are basically 2 ways to invest in mutual funds which are the Lumpsum & SIP methods of investment. In the case of lump-sum investment, investors make a one-time investment into the mutual fund whereas, in the SIP method of investment, a fixed amount of money is invested at regular periodic intervals.

6. How to invest in mutual funds?

You can invest in mutual funds via ZFunds App. The registration process is very quick & easy. And you also get a personal expert advisor to guide you on your mutual fund investments. 

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