How to invest in Mutual Funds for Beginners in India?

What are Mutual Funds? Mutual Funds are one of the popular investment terms that we hear about often. In simple words, it’s a company that collects funds from various investors and invests in various investment schemes such as stocks, bonds, gold, etc. These funds are run by professional and experienced fund managers.

In this article, we will talk about different mutual funds types, their pros, and cons, steps to investing in them, etc. If you are planning to start with mutual funds investment, this will help you in deciding where and when to invest.

Types of Mutual Funds

There are different types of mutual funds depending on their nature of investment and risk appetites. Let’s discuss a few of them.

Equity Funds

As the name says, these types of mutual funds primarily invest in stocks. The performance of this fund type will directly depend on the stock price in the stock market. Hence, this type of fund is categorized as a high risk fund.

Debt Funds

This fund invests mainly in debt fixed income securities. Fixed securities can be bonds, securities, treasury bills, etc. Compared to Equity funds, Dent funds are more secure and it’s suitable for the one who looks for regular income.

Money Market Funds

These funds are mostly invested into short term debt instruments, run by the government with the association of Banks. Investors who want to invest their funds for a short period of time with low risk can opt for this type of fund.

Tax Saving Funds

ELSS or Equity Linked Saving Scheme offers the investor the option to save on taxes. These funds have a minimum lock in period of 3 years and invest in equities primarily.

Pension Funds

As the name suggests, these funds are accumulated from the income and paid out after the career or at retirement. They invest in the stocks and bond market to gain good profit which will ensure the payout to the investor on time.

Benefits of investing in Mutual Funds

Mutual fund investment is very much popular and treated as a safer investment than investing in the stock market directly. Here we will review the top advantages of Mutual Funds.

Diversity

Mutual funds invest in various companies in the stock market, and other investment options such as bonds, securities, gold, etc. This helps the fund become a low risk in the volatile market as well (depends on fund type)

Expert Management

One of the biggest advantages of Mutual Funds is the investment is done by professional and experienced fund managers. They have a proper research team who performs the fundamental and technical checks on a company before investing with a minimal cost as a fee.

Flexibility of investment

Investment can be done through a monthly SIP (as low as 100) where you have the opportunity to invest in large companies as well. Since they accumulate the funds from multiple investors and invest in bulk, you get the profit share equally whereas in the stock market we don’t have that option.

Accessibility

Now-a-days, Mutual Funds are readily available via various apps or websites. Investors can start investing within a few steps without much paperwork or a lengthy offline procedure. Also, the Mutual Funds platforms are way more advanced and give flexible options to make any changes to the fund at any point in time.

Tax Saving

ELSS or Equity Linked Saving Scheme gives tax benefits to the investor. These funds have a minimum lock in period and can save up to 1.5 lakh in tax under section 80C.

Low fee

Mutual funds come with a very low fee attached to them. Since the Asset Management Fee is also divided among multiple investors, the individual fee is very low. This helps the investor to gain more profit out of the investment.

The risk factor of Mutual Funds

Though Mutual Funds have many benefits, we can’t overlook the disadvantages here.

Less control over the investment

All the investment strategy or decision is taken by the fund managers. Investors have no control over the investment scheme.

No fixed return

Mutual funds do not provide any guarantee of future return. The fluctuation in the market can also impact the fund performance negatively, where investors should be ready for market depreciation.

Past Performance

Mutual Funds show the past few years’ performances, which doesn’t guarantee the same return in coming years as well. Where there is a risk involved in these funds also, many investors are keen to follow the past performance alone to choose a Mutual Fund.

What is NAV?

NAV or Net Asset Value is a price given to the Mutual Fund Portfolio. This is similar to a stock price in a stock market, but the NAV calculation is different.

The Net Asset Value calculation formula is:

NAV = [Assets – (Liabilities + Expenses)] / Number of units outstanding

To compare its performance, we can check the day to day change in NAV.  However, investors are recommended not to check NAV to derive Mutual Fund stands in the market. There are many other parameters to be checked to find a suitable fund.

What is NFO?

You all must have heard about IPO in the news or trading apps. So, if a company has to enter the secondary market or wants to become a public company by offering a part of the company’s share. This is called an IPO or Initial Public Offering.

Similarly, an asset management company can offer NFO or New Fund Offer for any new subscription launched by them. Like IPO, NFO also opens for subscription for a limited period of time. The NAV will be fixed by the company and later on, it will be traded at the market NAV price.

Also Read: 5 Best apps to buy Mutual Funds in India 2022

FAQ Related to Mutual Funds