How to Invest in Mutual Funds: Simple 24-Step Guide & More

Surely you have financial goals like every other person in India. Very often, we do not know how to achieve these goals and make some extra money.

Traditionally, real estate, gold, fixed and recurring deposits with banks, life insurance policies, Public Provident Fund (PPF) and post office savings schemes are favourite among Indian investors from various income groups.

However, there is another equally attractive investment option available.

That is Mutual Funds. Nowadays, there is a lot of talk about investing in Mutual Funds.

Advertisements promoting Mutual Funds as attractive investment options are common on TV, newspapers, magazines and also bus stands, buses, taxis and malls.

You would definitely have heard the catchphrase: “Mutual Funds Sahi Hai,” on TV, radio or seen it in newspapers and other places.

So let us find out how to invest in Mutual Funds and how to make your money work harder to get good returns.

Why Mutual Funds?

Usually, banks pay between six and eight percent interest on a Fixed Deposit.

The same holds true for Recurring Deposits, PPF and savings schemes from India Post.

Investing in these is very safe. Your returns are assured and there are no imminent risks.

A life insurance policy actually earns you negative interest, according to various financial experts and news reports.

In fact, life insurance is not even an investment option, as you might falsely believe. Only insurance companies promote it as savings and investment options.

On the other hand, Mutual Funds offer great returns, sometimes as high as 18 percent over a period of time.

However, Mutual Fund prices can swing wildly since they depend on stock and money markets. Hence, they involve some risk.

So if you are interested in making your money work and give you higher returns, opt for Mutual Funds. The first step towards investing is understanding Mutual Funds.

What are Mutual Funds?

Mutual Funds are a basket or collection of stocks, financial instruments, debt guarantees, bonds and various other monetary documents.

An Asset Management Company (AMC) buys millions of Rupees worth of these financial instruments to create a portfolio of investments.

This portfolio is called Mutual Fund. The portfolio or Mutual Fund is then divided into units.

The AMC will sell you units of a Mutual Fund like a slice of the pie.

When you buy these units, you are actually buying a bunch of stocks and other financial instruments in which the Mutual Fund provider or AMC has invested money.

Also Read: Beginners Guide: How to Invest in Share Market of India

Eligibility to Invest in Mutual Funds

Under Indian laws, Mutual Funds can be bought by an individual investor above 18 years age or jointly with someone.

They can also be bought by businesses and Hindu Undivided Families. Non-Resident Indians are allowed to invest in Mutual Funds in India.

Citizens of US and Canada, including persons of Indian origin that have given up their Indian citizenship, are not allowed to buy Mutual Funds in India directly.

Instead, they can invest in the name of their relatives in India.

It is possible to invest in Mutual Funds in the name of minor children, provided you designate an adult guardian. This helps you to invest for your children’s future.

Benefits of Investing in Mutual Funds

Investing in Mutual Funds has many unbeatable benefits.

If you want to invest in stock markets but do not know how to choose the best stocks for high returns, Mutual Funds provide a great alternative.

Mutual Fund investments start from as low as Rs.500 only, which makes them very affordable to people with low income.

Mutual Funds are managed by a professional Fund Manager. This means, the AMC ensures your money is invested in the best stocks and financial instruments is professionally managed, which is something we cannot do.

They know which stocks to buy and sell at the right time for benefit of Mutual Fund investors. Fund Managers have the backing of excellent researchers that work with the AMC.

You can invest in over 9,000 Mutual Funds in India from some 35 AMCs. This means, you have almost unlimited choice of Mutual Funds to invest.

You can select the types of Mutual Funds depending upon financial goals, time span, risks you are willing to take and industries in which you wish to invest through Mutual Funds.

Also Read:10 Best Ways To Invest Your Money In India To Get Higher Returns

Types of Mutual Funds

If you want to know how to invest in Mutual Funds, it is important to know various types that are common in India. Broadly speaking, there are seven types of Mutual Funds.

Equity Mutual Funds

As the term suggests, an Equity based Mutual Fund will invest only in stocks of various companies that are listed on Bombay Stock Exchange and National Stock Exchange.

These are the most common and popular funds among investors.

There are various types of equity based Mutual Funds. They include Equity Linked Savings Scheme which provide tax benefits for investors.

Another is thematic Mutual Funds or those which are made of stocks from a single industrial or service sector.

Equity based Mutual Funds are also available according to stocks in which they invest.

You can invest in Mutual Funds that invest in blue-chip companies, stocks that have moderate market capitalization or Mid Cap and those with smaller market capitalization or Small Cap.

There are also Multi Cap Mutual Funds that include stocks of blue chip, Mid Cap and Small Cap companies.

Debt Funds

Debt Mutual Funds are those which invest your money in various kinds of bonds such as government bonds and debt instruments as well as arbitrage.

Since these investments are very safe, they come with very low risk. They provide a fairly decent return over a few years.

Hybrid Fund

Hybrid funds are a mix of stocks and debts. They usually provide moderate returns and have lower risk profiles as compared to equity funds.

Hybrid Mutual Funds are also a great option if you do not want to take much risk because drop in share markets is somewhat buffered by debt instruments.

Liquid Funds

Liquid Mutual Funds invest in money market instruments. These include treasury bills, commercial documents and term deposits, among others.

Liquid Mutual Funds are low risk investing opportunities. They offer good returns over a long period.

Fund of Funds

Fund of Funds (FOF) category invests in Mutual Funds of own or other companies. They can be a mix of equity, debt and liquid Mutual Funds.

Some AMCs in India also invest in Mutual Funds in foreign countries. They come with very high risk.

But they provide you an opportunity to indirectly invest in stocks in the US, UK and Europe, China and other parts of the world.

International Mutual Funds

As the term suggests, these Mutual Funds are made of stocks of foreign companies listed on stock exchanges in New York, London, Frankfurt, Tokyo and other financial centres.

Since performance of foreign stocks depends upon political and economic situations in those countries, they are fairly high risk.

Exchange Traded Funds

Exchange Traded Funds are a Mutual Funds that are traded like stocks on Bombay Stock Market and National Stock Exchange.

These funds can be bought and traded daily through your Demat account and stockbroking company.

Generally, ETFs are a choice of veteran investors that have great knowledge of stock markets.

Plan your Financial Goals

Now that you know something about various type of Mutual Funds and have some idea about returns they offer, it is essential to plan your financial goals.

Generally, investing in Mutual Funds gets excellent returns over a longer period of time. But there are several Mutual Funds that offer good returns in short and mid-term too.

Having a proper financial goal will help you choose the right Mutual Funds to invest. There are Mutual Funds that invest only for three years or even overnight.

Others provide good returns after five years while some might take 10 years or more to give you excellent values.

Hence, always base your investments in Mutual Funds based on short, mid and long-term goals.

Also Read: 20 Best Mutual Funds Companies in India For Long Term Investment

Documents to Invest in Mutual Funds

Once you decide to go ahead and invest in Mutual Funds, there are certain documents you will need to get ready.

  • Scanned copy of your Permanent Account Number (PAN) card. Get your PAN card and Aadhar card linked from the Income Tax Department online.
  • Scanned copy of Aadhar card.
  • A picture of cancelled and signed cheque from your bank account. It should clearly show your full name, the name of the bank and branch, IFSC code and MICR number.
  • You can also keep a PDF copy of your latest bank statement ready.
  • Scan or photograph of your address proof, if it is different from the one shown on Aadhar card.
  • Non Resident Indians can use valid passport.
  • If you do not have Aadhar and PAN card, other identity proof like ration card, government issued ID cards, bank passbooks and driving licenses in some cases are also accepted as proof. However, you will have to complete Know Your Customer formalities by visiting the AMC or Mutual Fund provider offices.

You can invest in Mutual Fund either as single or with one or more family member or even with friends. All investors will need the same documents.

Generally, PAN card is the most important document since Mutual Fund earnings are taxable.

E-KYC for Mutual Fund Investment

E-KYC or electronic Know Your Customer formalities are very important to invest in Mutual Funds.

This means, your PAN card and Aadhar card have to be linked through the Income Tax Department.

Secondly, you should have the same mobile number and email ID provided for your Aadhar card.

The Mutual Funds provider will send you a One Time Password (OTP) when you invest. It will be sent to your mobile number listed with the Aadhar card.

Please note that some AMCs have discontinued e-KYC formalities after the Supreme Court of India judgment regarding the use of Aadhar card.

In such cases, you may have to complete e-KYC by visiting the nearest branch of the Mutual Fund provider.

Bank Account for Mutual Fund Investment

Usually, a savings account with some good bank is sufficient to invest in Mutual Funds online.

However, this system also has some problems: Certain AMCs do not accept payments or have no agreements with certain banks, including nationalized banks.

And in cases where they have agreements, they might not accept payments from your particular branch.

Therefore, it is best to open a savings bank account with the Main Branch of any nationalized branch in your area or the nearest city.

If opening a new bank account at some major branch of your bank is not possible, you can also use a credit card or credit card to buy Mutual Funds.

Only selected AMCs offer the facility to pay for Mutual Funds with RuPay, Visa and MasterCard credit and debit cards.

Keeping in mind the need for more channels, some farsighted AMCs now also accept payments for online Mutual Fund purchases from Bharat Interface for Money (BHIM) apps using Virtual Payment Addresses (VPAs).

Another great option is to open a savings account with any leading private sector bank. Most AMCs accept payments from all branches of private banks.

A dedicated bank account for Mutual Funds is necessary. Your dividends or money from redeeming Mutual Funds will go into this account.

Also, if you plan on using a Demat account, you can link it to the dedicated savings account.

Ensure you have net banking facilities. It is necessary if you will invest online in Mutual Funds.

Select the Right Mutual Fund

Once you are ready to invest, the next and very important step is selecting the best Mutual Funds.

Remember this prime rule: Never go for any Mutual Fund merely because its name sounds fancy. Or simply because it comes from some very big AMC.

You have to select Mutual Funds based on how much risk you are willing to take. Equity based Mutual Funds come with moderate-high to very high risk.

Study historical Net Asset Values (NAVs) or various Mutual Funds and their growth since launch.

This will give you a clear idea of whether the Mutual Fund is worth your investment.

You can check excellent websites for the performance of various Mutual Funds you want to invest.

Also, it is better to make a portfolio that consists of a proper mix of Equity, Debt, Liquid, Hybrid and FOF Mutual Funds.

Most AMCs offer free, basic advisory services. You can call up their number or send an email and seek suggestions.

You can also consult a good financial advisor to know how to invest in Mutual Funds.

They can draw a proper Mutual Funds investment strategy for you for the amount of money you want to invest.

Open Ended or Close Ended?

There are two types of Mutual Funds- Open-Ended and Close Ended. Both have their distinct advantages and disadvantages.

Depending on your willingness to take risks with investments, you can select either of the two. Or you can invest in both types.

Usually, AMCs and Mutual Fund providers have Open Ended and Close Ended types. Select the ones that best suits your needs and help get best returns.

Online or Physical Purchase

Nowadays, most investors prefer investing in Mutual Funds online. It saves them lots of time and paperwork. To do so, you will have to visit the website of the Mutual Fund provider and register as investor.

To register, you will need PAN card number and bank details as well as phone number and email where they can communicate.

The AMC will check your e-KYC status instantly. Once this is done, you can fill the online form, select the scheme and begin investing.

If you do not wish to invest online for any reason, the process becomes a bit tiresome.

You will have to personally visit the Mutual Fund provider’s office, fill out forms, provide pictures and photocopies of Aadhar, PAN and other identity and address proof and write out a cheque or pay cash.

You can also invest physically by visiting a stockbroker or Depository Participant (DPs) office that provides Mutual Fund investments.

Usually, brokers charge a commission when buying Mutual Funds.

Check CRISIL Ratings

A great way to find best Mutual Funds to invest is by checking their CRISIL ratings online.

CRISIL ranks all Mutual Funds depending on various parameters such as where they have invested, increase in value and expected returns in future.

CRISIL rates Mutual Funds by giving them stars. The topmost Mutual Fund will have a five-star rating.

Newer funds or those whose performance cannot be judged will not get a CRISIL rating. Knowing CRISIL ratings is very important if you want to invest in Mutual Funds.

Know the Mutual Fund Manager

Most investors are unaware of this essential detail. Before you invest in a Mutual Fund, find out who is the fund manager.

The AMC website will usually display the name of the fund manager. You can also check various other Mutual Funds managed by the same funds manager.

Knowing the fund manager and performance of their Mutual Funds gives some idea about how well versed they are in the business. A great fund manager will ensure your investment gets the best possible returns and it stays secure.

Central KYC for Mutual Funds

Once you have invested in Mutual Funds, be ready to receive an email or letter asking you to complete Central Know Your Customer or CKYC formalities.

This can prove very confusing. From February 2017, Securities & Exchange Board of India (SEBI) requires that all stocks and Mutual Fund investors should comply with CKYC regulations.

CKYC is fairly easy but takes some time. You will have to complete a form visit the nearest brand of any AMC or Mutual Funds provider.

Staff at the AMC will verify your details on the spot. The process is called ‘In Person Verification’ or IPV.

Once you complete IPV, the National Securities Depository Ltd (NSDL) will send you a 14-digit KYC Identification Number or KIN.

Having a KIN allows you to make unlimited investments in Mutual Funds.

Every time you want to buy Mutual Funds from a new AMC, simply key in your KIN number.

It will save you the hassle of filling online forms and going through e-KYC procedures.

Lumpsum Investment in Mutual Funds

There are two options to buy Mutual Funds. One is lumpsum purchase. This means, you buy units worth a fixed amount of money.

Some Mutual Funds can be bought for as less as Rs.100. Investments in others begins at Rs.500.

Some need minimum initial investment of Rs.1,000 while others have minimum investment of Rs.5,000.

Before you invest, find out the Net Asset Value of the Mutual Fund. It will indicate how many units you will get for the money you invest.

Usually, a purchase order placed before 3pm between Monday and Friday will get you the closing NAV for the day. Lumpsum Mutual Fund purchases will reflect in your portfolio the next working day.

Investing in SIPs

The other way of investing in Mutual Funds is through Systematic Investment Plans (SIP). You can start an SIP with Rs.500.

Subscribing to an SIP means, the AMC will deduct a fixed amount of money from your bank account every month.

They will credit units of the chosen Mutual Fund to your portfolio every month, based upon average NAVs.

SIPs are ideal for long-term wealth building by investing small amount of money. You can also make own portfolio of SIPs.

Once you register for an SIP, the AMC will send you a Unique Reference Number. You have to use this URN and add the Mutual Funds provider as ‘Biller’ on your bank account online or by visiting the branch.

Generally, most Indian investors opt for SIPs since it helps to override stock market volatility. Money accumulates over a period of years and helps fulfil financial goals.

However, there are debates which form of investments are better- lumpsum purchases of various Mutual Funds or specific ones through SIPs.

Both sides have convincing arguments. Hence, you can take own call or seek advice of a good financial advisor.

Register a Nominee

While investing in Mutual Funds lumpsum or SIP, always register a nominee. This nominee can be any relative or friend. You can register multiple nominees too at the time of investing or add later.

Nominations can also be made in the name of minors, provided you list their legal guardian.

Nominating someone is the best way to ensure your investments are inherited by loved ones, in case of your death.

Diversifying Mutual Funds Portfolio

Remember this golden rule: your investment portfolio should never be based on Mutual Funds only. Mutual Funds are a risky investment.

They do pay good returns over years but putting all money in Mutual Funds can land you in financial doldrums if the stock market goes into tailspin.

At the same time, it is important to diversify whatever money you wish to invest in Mutual Funds.

Instead of building a purely equity based Mutual Funds portfolio, add some debt, liquid and hybrid ones too. This helps buffer losses caused by downturns of the stock market.

Switching Mutual Funds and SIPs

Very often, you may find the chosen Mutual Fund not performing well. While others in the same category or class are seeing higher NAVs, your investment remains stagnant or even goes down.

This is nothing to be unduly alarmed about. There could be various factors for the drop in NAVs. You can hold on to the Mutual Fund or SIP despite occasional NAV drops.

However, if the NAV drop is steep and indeed a cause for alarm, you can easily switch your investment.

Instead of redeeming the money, you can opt to exchange a few units of the Mutual Fund for another scheme of the same AMC, which is performing better.

Also, you can switch Mutual Funds and SIPs if you come across another great scheme of the AMC.

Depending upon how long you are invested in the scheme, the AMC can charge you a fee called Exit Load and other charges.

What about New Fund Offers?

Once you begin investing in Mutual Funds, you will get emails about New Fund Offers or NFOs.

This means an AMC or Mutual Funds provider is launching a new scheme or extending an existing one. NFOs are announced by various companies every month.

During an NFO, you can buy one unit of a particular Mutual Fund for Rs.10 only.

Some NFO rates are Rs.50, Rs.100 and also Rs.1,000 per unit depending upon the scheme.

Buying a unit at Rs.10 sounds very attractive. You may be inclined to invest in an NFO and get the highest number of units for a new scheme.

According to top financial advisors, NFOs are best avoided. They recommend that any good portfolio should not consist of more than five percent units from NFOs.

They have good reasons for the warnings too. Firstly, NFO schemes do not have a history. Hence, your investment is at very high risk.

There are no ways to find whether a particular scheme will flourish or flop once the NFO period is over.

Secondly, a new scheme launched by an NFO will take extremely long to reach its full potential.

This means, your money will not grow at the necessary speed. CRISIL does not rate NFOs.

Investing in a single wrong NFO can cause severe financial losses or negate income from other Mutual Fund investments.

Most NFOs come with minimum investment tag of Rs.5,000 which makes them expensive and risky too.

Holding Mutual Funds

Nowadays, all Mutual Funds are issued only in dematerialized or demat form.

This means you do not get a certificate or physical document stating the units you buy.

Instead, these units will be held in online folio by the AMC which you can access using a username and password.

There are some debates whether you should hold Mutual Funds and SIPs in a demat account.

There are more disadvantages in holding Mutual Funds in demat account. You will have to pay commission on every SIP purchase every month.

All transactions for Mutual Funds made through demat accounts attract a fee.

Holding Mutual Funds in a demat account is useful only when it comes to the nomination.

Instead of the nominee seeking money from various AMCs after your death, they can redeem your investments from a single point- the demat account.

Keeping Track of Mutual Funds

Keeping track of your Mutual Funds, either lumpsum purchase or SIPs is very important.

It can help you identify downward trends and if necessary, switch to other schemes. There are two ways to keep tabs on your investment.

The first is by creating an online account on the AMC website. You can view your Mutual Funds holdings with that AMC, its appreciation or depreciation on any given day.

The other is by downloading two apps. One is myCAMS app which comes from Computer Age Management Systems (CAMS).

The other is KFinKart, from Karvy. Since CAMS and Karvy are the two e-KYC providers, every investment in Mutual Funds will pass through their systems. Hence, these apps will show you Mutual Funds serviced by them.

Remember, myCAMS will not display Mutual Funds serviced by Karvy and the other way around. Hence, it is vital to download both these apps.

Free Insurance with Mutual Funds

Nowadays, some AMCs are offering free life insurance coverage- up to Rs.2.1million- for investors in SIPs.

There are various debates over usefulness and features of this free SIP insurance. The insurance cover is given on select Mutual Fund SIPs only.

If you opt for SIPs with free life insurance, read its terms and conditions very carefully. You might end up paying for the insurance without knowing.

Usually, life insurance with SIPs is form of group insurance. Hence, benefits are available to your survivors only under specific conditions.

Loans Against Mutual Funds

In case you did not know, you can take loans against your equity and hybrid Mutual Funds.

The bank or Non-Banking Financial Company (NBFC) from whom you avail the loan will hold your Mutual Funds as collateral.

This means the lender can cash your Mutual Funds if you fail to repay the loan.

Not all Mutual Funds will help you get a loan: every bank or NBFC has its own list of Mutual Funds they will accept as collateral.

Usually, a loan against Mutual Funds comes with about 8.50 percent interest tag. Such a loan has only one advantage: you get it faster since the lender has a collateral.

Wrap Up

Now that you know all details of how to invest in Mutual Funds, start your journey towards wealth building.

It can be easy and fun provided you do some great research before putting in the money.

Seek professional advice from a financial expert or read enough information about Mutual Fund investments before making investments.

Some Mutual Funds also help you save Income Tax. These type of Mutual Funds are called Equity Linked Saving Schemes.

You can provide details of ELSS investments and seek tax exemption while filing returns every year.

Mutual Funds can provide excellent returns if you invest astutely. The best part of Mutual Funds is you never lose money. They do pay off if you stay invested for the long run.

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