How to Invest in Mutual Funds (2024)

What if you could invest your Savings and have someone else manage them wisely and professionally on your behalf?

Mutual Funds work the same way and are professionally managed investment vehicles that pool money from Investors. Mutual Fund Investments may seem scary at first, especially for newbies. However, there is no going back once you are well-versed in How to Buy Mutual Funds. In this blog, we have covered all the nitty-gritty of Mutual Funds.

A few primary steps to start investing in Mutual Funds Online: open an account, learn how to pick Mutual Funds, understand how Mutual Funds work, and start investing!

Continue reading to learn more about how to invest in mutual funds in India.

How to Invest in Mutual Funds - 5 Easy Steps

Anyone person who is wondering how to start investing in mutual funds can follow these 5 easy steps for investing in mutual funds-

• Step 1: Start with risk profiling, i.e., to understand your risk tolerance and capacity. Knowing the amount of risk one can take before investing in mutual funds is essential.
• Step 2: After completing the risk profiling, the next step is asset allocation, where you must divide your money between various asset classes. Asset allocation should include a mix of equity and debt instruments to balance the risk factors.
• Step 3: The third step is the identification of funds that invest in each asset class. Then, you can check for past performance or investment objectives for comparing mutual funds.
• Step 4: Select and decide the mutual fund scheme you will invest in. You can then start the application either online or offline.
• Step 5: Diversifying your investments and regular follow-ups are essential to ensure better results and higher profit.

How to Invest in Mutual Funds Online?

It is essential to understand how to invest in mutual funds through online mode. Investing in Mutual Funds, Onlinecan be pretty simple and can be made in one of two ways-

1) By Creating an Account on an Official Website (AMC Website)

Every Asset Management Company has an official website where you can find multiple Mutual Funds in each category to invest. You have to follow the instructions provided on the official site of the fund house, fill in all the required information, and submit it.

The KYC process can also be completed online (e-KYC), for which only the Aadhar Number and PAN are needed. The information provided by you is verified at the backend, and you can start investing upon successful verification.

• Through an App

Asset Management Companies allow investors to invest in Mutual Funds through mobile applications quickly and hassle-free. The AMCs have mobile applications, and third-party mutual fund aggregators provide a platform to invest in Mutual Funds.

The app enables the investor to invest in Mutual Fund Schemes, view account statements, buy or sell units and check other relevant details about their portfolio. Moreover, investors can invest in various funds offered by different fund houses.

You can also wish to invest offline with the AMCs, as most continue to provide this feature.

How Do Mutual Funds Work?

An Asset Management Company (AMC) pools investments from various individuals with common investment objectives. This collective amount is then invested as per the fund's investment objective. For example, it could be invested in securities like stocks, bonds, money market instruments, commodities such as precious metals, and other similar assets.

Financial experts manage these funds called fund managers, who align with the specified investment objective of the fund and invest in creating growth or appreciation of the amount for investors.

The AMCs charge an expense ratio which is nothing but the annual maintenance fee to manage the investments of individuals. The investors earn money with regular dividends/interest in capital gains. Furthermore, one can reinvest the capital gains through a growth option or make a steady income with the dividend option. In simple words, mutual funds are the diversification of the investment.

Costs of Investing in Mutual Funds

• Expense Ratio

The expense ratio is the percentage of average assets under management that go towards such expenses that Asset Management Companies (AMCs) incur. For example, AMCs incur administrative expenses, fund management, distribution, etc., to run their businesses.

• One-Time Charge/Transaction Charge

A nominal amount may have to be paid by investors as transaction fees. For investments below Rs.10,000, no transaction fee is levied. This may change depending on the AMC.

• Exit Load

Exit load is charged when an investor withdraws money quickly. It is set as a percentage of the scheme's prevailing Net Asset Value (NAV).

• STT

When an investor decides to sell mutual fund units, a Securities Transaction Tax (STT) is levied.

• STT for Different Schemes

• For close-ended schemes and ETFs: 0.001% of the traded value
• Open-ended equity-oriented schemes: 0.25% of the traded value
• Debt Mutual Fund units: No STT

• Stamp Duty

Stamp duty is applicable on the issuance and transfer of Mutual Funds irrespective of whether units are held in Demat or physical mode. Stamp Duty is a direct tax levied by the government.

• Stamp Duty in various cases

• Purchases, fresh instalments in existing SIPs and STPs, Switch-in, and Dividend reinvestment transactions: 0.005%.
• Transfer of units from one Demat to another plus the off-market transfers: 0.015%.

Points to Keep in Mind Before Investing in Mutual Funds

Your next step in investing in Mutual Funds is to choose the appropriate fund once your account is set up and you are fully aware of all the costs involved.

Here are some considerations you should make when selecting a Mutual Fund.

• Goal of Investing

This becomes the foundation of your investment; defining your investment goals can help you select the proper fund accordingly.

Whether buying a new house, car, wedding child’s education, retirement, or any other, deciding the goal of the investment is a must. In a nutshell, one should have a bigger picture of how much wealth one wishes to accumulate and for what duration.

• Choose the Right Fund for Yourself!

Do your homework well, as the market is brimming with options, and choosing the best fit for you might be tricky. Evaluate the fund you select with your investment objective, risk appetite, your affordability.

You can also get help from a financial advisor if you face difficulties choosing the right one.

• Consider the Risk Factors

One important thing to remember comes with a particular set of risks. Schemes with high returns often come with higher stakes. You can go with equity schemes if you have a high-risk appetite and your investment objective is to accomplish high returns.

On the other hand, if you don’t want an investment with high risk and moderate returns that can fulfil your investment objective, you can go for debt schemes.

• Keep Your KYC Documents Updated

One cannot invest in a Mutual Fund if one is not compliant with Know Your Customer (KYC). Therefore, investors must comply with KYC guidelines to invest in Mutual Funds. You need your PAN card and valid address proof to become KYC compliant.

Conclusion

Despite the abundance of investment options available, mutual Funds remain one of the best and most practical ways to invest your money.

One of the main advantages is that your money will be professionally managed by fund managers who have done extensive market research. Not to mention, one of the key advantages of investing in Mutual Funds is the diversification of your portfolio.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.