Picture this: you’ve got a professional system looking after your money, helping it grow while you kick back and relax. That’s the essence of investing in mutual funds! In this user-friendly guide, we’ll walk you through all the fundamentals, so you can begin your mutual fund journey with certainty and ease.
The Context
Mutual funds have historically offered safety and diversification, and they spare you the responsibility of picking individual stocks — Ron Chernow
For decades now, both novices and experts have enjoyed investing in mutual funds for various reasons.
Mutual funds are like pre-packaged and ready-to-use no-brainers that provide passive access to the equity, bonds & commodity market. With total assets under management (AUM) exceeding Rs. 39,50,323 crores as of October 31, 2022, mutual funds are a sizable industry in India.
Mutual funds (MFs) aid you in lowering unsystematic risk by investing across a diverse portfolio of businesses from different industries in one go. In our expert opinion, investing in mutual funds can be seen as delegating labor-intensive tasks and other financial complexities to a fund manager or financial institution.
For a fee, they handle the grunt work of selecting stocks, conducting analyses, purchasing, and offloading as needed. If you’re among those who are gathering the courage to invest directly in stocks in the future but are eager to benefit from the present economic boom now — mutual funds are fantastic options.
Additionally, even if you master the art of stock selection, it is preferable to hire professionals to do time-consuming sector analyses, such as those of the banking industry. We make this statement because banks operate differently than typical businesses, which results in their untidy balance sheets. This jumble usually includes complex items like corporate & consumer loans, credit cards, non-performing assets (NPAs), and certificates of deposits (CDs).
Due to the high debt levels, performing a value analysis like DCF in this situation is unfeasible. As time is the most valuable resource in the world of investing, it is always preferable to avoid wasting it on laborious quests when there are thousands of other low-hanging multi-bagger opportunities out there just waiting to be found.
To help you save time as you embark on your financial expedition, here is an easy step-by-step guide to getting started with mutual funds.
Step 1 | Identify A Fund House
In India, there are roughly 44 asset management companies (AMCs) or mutual fund institutions.
Mirae Asset, ICICI Prudential, SBI, PGIM, ICICI Prudential, and DSP are a few of the front-runners.
Relying on fund house is quite uncomplicated because they are all compliant with SEBI, the Securities & Exchange Board of India. All you need to do is look for solid foundations and assertive management. You may want to check to see if the MF house you like has any history of scandals, staff fraud, or unethical behavior.
Additionally, you can finish your fundamental study by browsing the website of “Associations Of Mutual Funds In India (AMFI)” where we recommend you read customer reviews to better understand the attitude of the current user base.
Step 2 | Choose A Fund
The most important factor in investing in mutual funds is fund selection. To reap the benefits of a fund’s full potential, choosing one typically requires a long-term commitment that should be maintained for several years at a time.
Even though there are countless permutations available, you should stay with the most popular ones to ensure liquidity.
If you are just beginning your mutual fund investing adventure, try to hold off on participating in new fund offers (NFOs).
This is a smart move because, like IPOs, NFOs lack performance data. It is therefore challenging to evaluate its long-term performance. Additionally, try to avoid stuffing your portfolio with a tonne of mutual funds. For instance, 3-5 solid mutual funds from the large, small, and mid-cap categories should be sufficient to give you a fair level of diversity and equity exposure if you wish to passively invest in equities.
You should also always bear the following things in mind:
🐷Choose the right equity, debt, or hybrid fund based on your financial objectives, time horizon, and risk tolerance.
Thematic or sectorial funds should be avoided since they could make you vulnerable by overexposing you to particular industries.
🐷Select the fund that has “Direct” either before or after the fund name.
The other versions you see, with the term “Regular” written over there, are the funds used by the retailer and have a high expense ratio disguised for the retailer’s commission.
🐷It’s crucial to examine the fund’s contents.
In the case of a debt fund, this would suggest the credit quality of underlying financial instruments or the quality of the companies for an equity-based mutual fund.
🐷Understanding the fund manager contributes to your fundamental analysis as well. Try to seek a fund manager who is qualified and experienced. This is a top-down approach to selecting a fund.
🐷Know your fund’s expense ratio.
These are the bundled charges, indicated as a percentage, that are billed as transaction costs, investment management fees, administrative costs, sales and marketing/advertising expenses, registrar fees, custodian fees, and audit fees.
A high fund ratio may not always indicate a successful fund and vice versa. Verify whether the returns or the fund manager’s expertise support the expense ratio.
Large mutual funds typically have lower expense ratios, but their high assets under management (AUM) can make it challenging for a fund manager to execute purchase and sell decisions.
🐷Examine relevant measures including the Sharpe Ratio, R-squared, Standard Deviation, Alpha, and Beta. To understand more about these markers, click here to read our recommended how-to guide.
🐷Don’t place undue reliance on prior performance. Though past performance is an important consideration, it does not, however, have to be the foremost factor.
When you are finished choosing, you must head to the official app or website of a fund house.
Step 3 | Registration & KYC
There are three ways you can choose to invest in mutual funds: online (digitally), offline (on paper), and through registered intermediaries (directed). Third-party providers known as intermediaries gather and streamline the investing process in exchange for additional fees.
Although it is a personal decision to invest through a distributor, the cost ultimately proves to be significant. According to us, the majority of registration interfaces offered by fund houses are commodiously user-friendly and help save a good amount of money in the long run. As you proceed, you must first complete the KYC process by filling out the required KYC form, whether through conventional paper-based or online methods.
The term “Know Your Customer” (KYC) refers to the Customer Identification Process, which is a necessary step in opening an account with any financial institution. The KYC process verifies an investor’s identity and address using pertinent supporting papers, like photo IDs. (such as a passport, Aadhaar, or PAN card) and evidence of your address.
Online KYC for mutual funds can be completed at any mutual fund investing portal or at the website of the KRA (KYC Registration Agency).
Click here to complete your KYC at KARVY.
Step 4 | Set Instructions
Any website for mutual funds has a user interface that offers selection options for choosing investor-friendly variables.
You have two primary options for investing: a one-time lump sum or a Systematic Investment Plan (SIP), which is a favored method of systematic and regular capital infusion. You can also tailor your SIP conditions through sub-options such as regular SIP, flexible SIP, top-up SIP, trigger SIP, and perpetual SIP.
As you contribute a set amount each month (regular SIP) to ride out the market’s ups and downs, it helps to average down investment costs. A SIP is versatile and can also be interrupted, started, or augmented by sporadic lump-sum infusions.
You may simply use the i-SIP facility on the fund house website by entering your desired amount, frequency, and bank information. After submission, a URN is generated. You are then requested to log into your bank account and add the mutual fund as a “biller”. The URN helps confirm the correct linking process.
Your mutual fund setup is now complete. But this is when your actual investment work begins.
Step 5 | Track Performance
It is useless to monitor a mutual fund’s performance daily or weekly. Save yourself some time and check in on your investments every six months. If you have anxiety, turn your attention away from the short-term market turbulence and onto the long-term objective. You can get to better understand your fund by having a six-monthly audit. It’s quite acceptable for there to be a small difference in returns from a fund of a comparable type.
Do not withdraw and reinvest money from the fund for petty reasons like a 1-2% return variance over six months; this can cost you even more money on account of your indecisiveness.
Fund hopping without a valid reason hurts total performance.
You may however switch to another fund guilt-free if your fund consistently performs worse than its competitors, but eventually, seek and commit to one for the long haul. If you have several mutual funds, you can use a “Combined Account “, (CAS) statement provided by depositories every month to simplify the tracking procedure. You can also utilize free, extremely user-friendly applications like ET Money or Money Control.
Step 6 | Withdrawal Process
Your investments can be liquidated quickly and easily. You can simply visit the mutual fund’s official website to redeem your mutual funds online. If you have acquired funds through intermediaries, you can perform the same action on third-party portals.
For liquid assets, the redemption process typically takes 1-2 business days. It typically takes 2-3 working days for debt funds and 3–4 working days for equity funds. The first identified unit holder’s registered bank account will be credited with the profits of the redemption.
In some cases, you might be required to pay an exit load of 1% if you choose to redeem a fund before the first year has passed since your initial investment. This usually depends on your mutual fund company and the nature of your investment.
While exit loads are frequently imposed on Equity mutual funds, Ultra-short-term or liquid funds might not require you to pay an exit load.
Step 7 | Tax Implications
Do bear taxation in mind, as a mutual fund becomes taxable as soon as the withdrawal amount reaches your account.
Profits from mutual fund investments are taxed similarly to profits from investments in other asset classes. In equity funds, short-term capital gains are taxed at a rate of 15% plus a 4% cess if the units are sold before one year. If the gain within a fiscal year exceeds Rs 1 lakh, long-term capital gains tax in equity funds is 10% + 4% cess.
Up to Rs 1 lakh, long-term capital gains are tax-free.
Tax deductions are available for investments made in Equity Linked Savings Schemes (ELSS) under Section 80C of the Income Tax Act. A tax benefit of up to Rs. 1.5 lakh can currently be claimed each year for Equity Linked Saving Schemes (ELSS), which have one of the lowest lock-in periods. Due to these factors, ELSS funds are a well-liked tax-saving choice among investors.
You are suggested to conduct additional research or consult your Chartered Accountant (CA) for a better understanding of taxation on investment items because it is a deeper topic.
Conclusion
Many stock investors who invest directly have conflicting views on mutual funds; nonetheless, our viewpoint deviates from the accepted wisdom. From our perspective, mutual funds are the ideal way to outsource labor-intensive analytical work often associated with valuing complicated firms and sectors for a modest charge.
They are also the ideal tools for people who wish to concentrate on increasing their income right now while simultaneously benefiting from economic growth. The Internet revolution has made investing in mutual funds simpler than ever, and we hope that this guide will assist you in getting started.
If you’re interested in learning more about mutual funds, you may read our earlier articles, where we contrasted direct stocks and mutual funds and covered how to pick the best fund by clicking the links.
If you’re still unsure about where or which fund to invest your money in, speak with a financial advisor. A financial advisor can help you make a decision based on your goals and available resources. This is the end of our how-to article on investing in mutual funds.
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