Creation of wealth is a challenge to almost every individual who wants to have better financial stability in future. Investors can take advantage of the capital market by investing in mutual funds. This financial tool is pretty sophisticated, and a simple definition is not enough to comprehend the entire modus operandi. It can be confusing and therefore, we need to understand how it works so that you can take your first step towards this journey. Here is how to invest in mutual funds:
Checklist to follow while investing in a mutual fund:
How it works: The first step is to understand how a mutual fund works. Mutual funds are the pool of savings accumulated from several investors under a selective scheme that is administered by an asset management company (AMC). Following the scheme’s investment objective, this collected money is invested in different securities like equity, bond, dividends, etc. The fund manager of AMC handles these portfolios as per market conditions and create wealth. The fund house charges an expense ratio as an annual fee for managing these portfolios. The investors have the opportunity to earn money through dividends or capital appreciation.
Identify your purpose of investment: As you know, how the mutual funds work the next step is to identify the investment goals, which can be funding a child education, wedding events, purchasing a home or car, etc. In the absence of a goal, you must at least decide how much wealth you wish to acquire in a specified time period. Identifying helps an investor in determining the lock-in period, risk, payment options and others.
Understand the schemes: Almost every investor get confused in selecting a scheme as mutual fund are overloaded with a variety of options that suits the different needs. You need to do proper homework by market exploration in understanding the schemes. Depending upon your affordability and risk appetite, you can select the one that gratifies your needs. To even out the risk, it is better to invest in a diversified portfolio where you diversify across investments and instruments. Additionally, you need to check other criteria like fund manager credentials, portfolio components, asset under management and expense ratio.
Consider your risk appetite: It a well-known fact that mutual funds come with a set of risks, and thus, investments need to be done accordingly. If someone has a high-risk appetite and wants substantial returns, then they can opt for equity schemes. On the contrary, if you are inclined to achieve moderate returns with lesser risks, then balanced or debt funds are advised. As a first time investor if you are eager to invest in the equity-linked scheme, then select the Systematic Investment Plan (SIP). It reduces the risk of catching the market peak by allowing you to spread your investment over time at various levels of the market.
Consult a mutual fund expert: The process of mutual fund investment is not very easy and can be overwhelming at times. There are a handful of mutual funds available to pick from and further, it requires careful monitoring on its performance. At certain times an investor might need to switch from the low performing funds. Hence, we recommend to seek and consult from a mutual fund expert in selecting and managing the appropriate mutual fund.
Duration of mutual funds: As an investor, you must be aware of the holding duration of different mutual funds when you are investing your resources in any mutual fund against a particular financial goal. In every category of the mutual fund, there is a risk associated with term duration. If you fail to invest as per the given norms of the time horizon, you will succumb losses instead of gaining good returns. In the case of equities that have the capability of generating higher returns, the risk of capital erosion gradually reduces over a wider duration of three years.
Low initial investment: Mutual funds are outfitted with options of diverse portfolios and the investment amount can be as small as INR 500. There are alternatives to both lump-sum and systematic investment plans (SIP). Eventually, if anyone selects the SIP, it reduces the overall cost of investment and unleashes the power of compounding.
Tax-savings: Section 80C covers the tax deductions on specific financial instruments, and mutual funds fall under this category. However, if anyone proceeds with the popular tax-saving Equity Linked Savings Scheme (ELSS), they can save owing to its highest returns within the shortest three years lock-in period.
KYC Documentation: Finally, one must be ready with his Know Your Customer (KYC) documents like PAN card, Aadhaar card, residential proof, age proof, etc., as required by the fund house. KYC Documentation is mandatory in India for conducting any financial operations.
The very thought of ‘how to invest in mutual funds’ is a daunting task and requires a little research and analysis of your financial objective. If you proceed according to the due checklist, then chances of getting better results increase considerably.