Mutual funds are often hailed as the right choice for growing wealth, thanks to their diversification and professional management. However, the countless options, terms and strategies may make you feel the investment process in mutual funds is overwhelming.
Investing does not have to be cumbersome. With conceptual clarity, you can start growing your wealth and secure your future. In this blog, we will walk you through how to invest in mutual funds and factors to focus on why investing in such funds.
Understanding Mutual Funds
Mutual funds are a safe way to invest your money for growth. They work by pooling money from different investors and investing it in different security types, such as bonds, stocks, gold, shares, etc. Since the fund is distributed, it creates a less risky environment for budding investors.
In addition, the investors receive the returns from mutual funds through a proportion based on the Net Asset Value (NAV). The funds are managed by an Asset Management Company (AMC) and play a significant role in the investment market as it oversees and manages mutual funds and other investment instruments.
Things to Focus on Before Starting to Invest in Mutual Funds
Before diving into how to start investing in mutual funds, you must consider several factors. These are:
- Expense Ratio and Exit Load: The expense ratio measures the total expense to maintain a fund against its net value. AMCs charge an exit fee when you exit any mutual fund. As an investor, you must pay these charges when investing in a mutual fund.
- Fund Size: Always check and compare Assets Under Management (AUM) when investing in a mutual fund, as it indicates the fund size of the mutual fund.
- RRR: Risk-Reward Ratio or RRR measures how much return you will get for every rupee you invest.
- Fund Performance: Before investing money in any mutual fund, check its past performance. You can compare its 5-year performance with its benchmark to get an idea of its track record.
- Tax on Gains: The returns you earn by investing in mutual funds are subject to taxation. These are called capital gains tax and are subdivided into short-term capital gains and long-term capital gains.
Mutual Fund Investments: A Step-by-Step Guide
After researching the factors thoroughly, you are ready to invest in mutual funds. This section will provide a step-by-step guide on how to purchase mutual funds:
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Complete the Know-Your-Customer (KYC) Process
One of the key steps of investing in mutual funds is completing the KYC process. You must do it only once to verify details as an investor.
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Select a Mutual Fund Scheme
Select an appropriate mutual fund scheme on the basis of your financial goals and risk appetite. You must consider the time period, expected return and risks, before investing in a fund. Moreover, you can consider the expense ratio, fund manager experience and past performance.
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Make an Application
After selecting a mutual fund, you can apply it directly through the AMC’s online portal or a trading platform, like Torus Digital.
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Transfer Funds to Your Demat Account
The last step involves transferring the selected amount from your bank account to the Demat account to invest in your selected mutual fund. The AMC will generate a CAS (Consolidated Account Statement) and folio number.
What are the Different Types of Mutual Funds?
Just as how to invest in mutual funds in India is a common query, the types of mutual funds also confuse people. Mutual funds in India are diverse and can be divided into the following categories:
- Management of Portfolio: These mutual funds are maintained either actively or passively.
- Organisation Structure: Mutual funds based on structure include open-ended, close-ended and interval.
- Underlying Portfolio: They include debt, equity, hybrid, money market instruments and multi-asset.
- Investment Objective: They are further classified on the basis of liquidity, growth and income.
- Overseas Funds: They are also known as international mutual funds and involve investing in a foreign company.
- Exchange Traded Funds: ETF refers to a collection of investments such as equities or bonds.
- Fund of Funds: FoF mutual funds invest in other mutual funds using their resource pools.
- Thematic/Solution-Oriented Funds: These include tax saving, arbitrage, retirement benefits, child welfare, etc.
Final Thoughts
Starting your investment journey may feel overwhelming, but with the right approach, the process becomes straightforward. Learning how to invest in mutual funds is the preliminary step in achieving financial stability.
With Torus Digital, you can start your investing journey with ease. Torus offers 3-in-1 financial services. You can utilise banking, trading and demat accounts all in one app. Download the app today!
