Never Invested in Mutual Funds? Here's How to Begin

 

These days, mutual fund promotions are all around us. Newspapers and the online media writes about them, fund companies advertise about them and even regulators and associations like SEBI and AMFI have run campaigns on mutual funds. And for good reason.

The advantages of investing in mutual funds are many. Mutual funds are flexible and liquid investments; you can invest and redeem any time you want (with the exception of ELSS funds that have a lock-in period of 3 years). Mutual funds also have the capacity to deliver higher, tax-efficient returns as compared to traditional investment options like fixed deposits. Mutual funds come with numerous benefits, but a lot of prospective investors procrastinate investing because they don't know how to begin investing in them.

If you are a first-time investor, let's understand how you can begin investing in mutual funds.

Choose the right type mutual fund

The first step is obviously to decide on the mutual fund category that you need to invest in. Mutual funds can be broadly categorized as equity funds, debt funds and hybrid funds. Even within these broad categories, there are many types of mutual funds. You need to carefully decide on the type of fund you wish to invest in. Broadly speaking, for first-time investors a balanced fund or debt fund (dynamic bond fund or income fund) would be a good option to begin with. These are funds that will give you better-than-FD returns.

Select a good fund to invest in

Once you have narrowed in on the type of mutual fund that you wish to invest in, you need to choose a good fund from that category. This is not simple because there are hundreds of mutual fund schemes within each category. It is easy to fall for the wrong fund by going just by its recent performance. Don't make that mistake. Select a fund on the basis of its long-term performance. A fund that has earned good returns over different time periods would be a better choice than a recent outperformer. Apart from the returns earned by the fund, it is also important to look at other factors like fund manager's credentials, expense ratio, portfolio components, assets under management, etc.

If you have a big amount to invest, you should consider investing in more than one mutual fund. A portfolio of funds will help you diversify across instruments and investment styles. Having more than one fund will also ensure that in the event of one fund underperforming, your entire portfolio's returns don't come down drastically.

Go for SIPs instead of lump sum investments

After you have selected a well-performing fund(s), you should make sure you invest in them through a systematic investment plan, especially if you are investing in equity or equity-oriented funds. While a lump sum investment can put you at the risk of catching a market peak, an SIP will allow you to spread your investments over time and invest at different levels of the market. The benefit of rupee cost averaging that comes with SIPs also helps you earn higher returns over the long-term.

If you have a big amount to invest, you can invest it entirely in a debt fund and start a systematic transfer plan (STP) to an equity fund.

Get KYC and documents in order

You cannot invest in a mutual fund if you are not KYC-compliant. KYC stands for Know Your Customer and is a government regulation that is required to be done for most financial transactions in India. KYC is a one-time exercise that needs to be as per RBI guidelines. It is just submission of identification proofs that you can do online at the time of investing in a mutual fund. To become KYC compliant, you need your PAN card and valid address proof. 

To invest in mutual funds, you will also need a netbanking account. Mutual funds allow investments to be done through debit cards and cheques, but a netbanking account is the easiest and safest option.