Mutual fund investments are probably the safest bet for first-time investors who want to start investing. Think of them like picking a ‘tour’ to travel to your holiday destination. Everything is planned for all you need to do is pack your bags and enjoy the journey.
This is how mutual funds work: A mutual fund is a trust that pools in your money with other investors’ money and appoints an asset management company (AMC) to professionally invest it in stocks, bonds, fixed deposits etc. Just follow these steps before you start investing:
Step #1 Think of your destination (i.e. investment goal)
You could be saving up for a car which is a short-term goal or your child’s education which is a long-term goal. Depending on your goal create a portfolio. This means dividing your money between high-risk assets (like shares) and low-risk assets (like fixed deposits and government bonds). This is also called as asset allocation. Ideally, asset allocation depends on how much risk you can take as an individual. According to experts the percentage of money in low-risk debt funds should be equal to your age and the rest in equity funds. So a 25-year-old would invest 25% in debt fund and 75% in equity fund while a 60-year–old will invest 60% in debt fund and 40% in equity funds.
Step #2 Depending on your destination pick a plan
Based on your objectives there are 3 major types of funds for you to choose from –
#1 Growth Funds which invests only in equity and give an average return of 10%-20%. Although returns are high, risks are also high.
#2 Fixed Income which invests in instruments like government bonds and debentures that give fixed income. These funds give an average range of return of 7% -9% and they serve as a great way to make returns on idle cash.
#3 Balanced Funds which invest in both growth and fixed income assets and give an average return of 7%-15%.
Once you know what you want from your mutual fund pick a fund that suits your needs. Suppose you need a steady source of income and you’re not a risky investor then buy fixed income funds. Ideally, diversify your money by investing in a number of funds to minimize your risk.
Step #2 Shortlist and compare
Once you’ve selected your funds, compare them based on their past performance and investment philosophy. Shareholder reports and prospectuses provided by AMCs will help you with this process. Don’t just go by current performance, but check their performance over longer periods like 6 months, 1 year, 3-year and 5-year returns. Also, compare their performance with other funds having similar objectives. Remember to account for the fees attached to the investment that will be deducted by the AMC. And lastly, pick established funds with a proven track record. If you’re unsure about doing this yourself, consult a mutual fund advisor or financial planner for help.
Step #3 Start booking
After shortlisting the funds, that meet your goals, open an account with fund houses and complete your KYC (a one-time process that requires a self-attested photocopy of your address proof, a PAN card and a photo). You can open a mutual fund account through the following ways –
- A bank (although they might be biased sellers of their own mutual fund products so avoid this route)
- Through online portals like FundIndia.com
- Through registered individual mutual fund advisors or agents (you can find the nearest agent on the AMFI website)
- Through the AMC website or office (All mutual funds provide this option now)
- Through transfer agents like CAMS that act as points of contact between the investor and company.
Step #4 Prepare a Budget
Once you’ve created your account decide how much you want to invest. An organized way to invest in Mutual Funds is through systematic investment plans (SIPs) that allow you to invest small amounts as low as Rs. 500 per month in mutual funds at fixed intervals (typically, once a month). And if you link your SIP with your bank account your investments will happen automatically every month.
Step #5 Keep track
You would have heard ‘mutual fund investments are subject to market risk. Please read the offer document carefully before investing’ This means that depending on the movements in the market your mutual fund units will fluctuate in price.
However, the risks are not as scary as investing on your own in the share markets because a mutual fund is a professionally managed investment. But that doesn’t mean you should not track them at all, periodic reviews, yearly are a must.
Just like that, you’re on your way to becoming an investor. Got any questions for us? Comment below.