Have you been thinking about how to invest in mutual funds for a long time? By now, you must have rummaged the internet, trying to piece it all together.
While the mutual fund industry has immense potential, a lot of people are still skeptical about how to invest their money. This unsure approach is reflected in numbers as well. As per reports, only 8% of the Indian population invested in mutual funds up till 2023. On the contrary, other developed countries witness greater numbers, such as the United States, where 46% of the population chooses mutual funds for investment.
Now that you have hopped on to this post, you are welcome; let us make it simple for you. Dig into this step-by-step guide to learn how to invest in mutual funds!
Why Invest in Mutual Funds?
Mutual fund investment is an effortless method of pooling money. Investors, both new and experienced, invest in a fund they prefer, and it is becoming extremely popular. Why the popularity? Because the industry in India is advancing with leaps and bounds.
The AMFI, which is a mutual fund association in our country, has some great reports regarding the subject. As of October 2024, the Assets Under Management (AUM) in the mutual fund industry stands at INR 67.26 lakh crore, according to the association. Nearly 44 AMFI-registered fund houses offer over 2,500 mutual fund schemes.
Furthermore, a wide variety of mutual fund products have been able to accommodate investors’ different risk tolerances and return expectations.
So, when you invest in mutual funds, the fund’s knowledgeable and experienced fund manager will use the money to buy additional assets. The plan will also include asset purchases and sales per market trends and manager discretion. The value per share or net asset value will be dependent on the fund’s performance. Every fund investor will own units/shares, get dividends on those shares, and profit from capital gains.
Learn To Invest in Mutual Funds: Step-by-Step Instructions
Finally, here is a complete and very easy-to-understand list of steps that will also cover tips you will be requiring as you start.
1. Define Your Investment Goals
First things first: you must define your investment goals before anything else. Are you parking money for the short term, planning for retirement, growing your capital, or saving for a specific milestone? Once defined, these goals will ease your mutual fund selection and help you grab the most suitable option.
- High-risk, high-return funds work best for aggressive, long-term goals.
- Low-risk, stable funds are ideal for conservative short-term objectives.
- Short-term vs. long-term funds: Some funds excel in short-term gains, and some perform better when held for longer durations.
Therefore, you need to know your goals clearly so that mutual funds are in line with your expectations.
2. Evaluate the Key Investment Factors
After the important step of goal setting, you can move towards evaluating and comparing mutual funds to find what fits in perfectly. It is suggested that you look into these key factors before you invest in mutual funds:
| Factor | Explanation |
| Fund Performance | Analyse how a fund has performed over the past 3–5 years. Compare it with peers and market benchmarks for consistency. |
| Fund Manager Expertise | Review the manager’s qualifications and track record. This way, you ensure your capital is in capable hands. |
| AUM (Assets Under Management) | High AUM signifies strong participation and stability. |
| AMC Performance | Assess the Asset Management Company’s track record in managing diverse schemes. |
| Net Asset Value (NAV) | The NAV reflects the fund’s share price. A rising NAV indicates growth, while a declining NAV signals losses. |
| Expense Ratio | This is the fee charged for managing your money. A lower expense ratio often translates to higher returns. |
| Exit Load | Some funds charge an exit fee when you sell. Look into this cost beforehand. |
| Liquidity | High liquidity allows for easier withdrawal when needed. |
| Tax Implications | Understand taxes like TDS, dividend tax, and capital gains taxes to manage your finances wisely. |
3. Finalise Your KYC Process
This step is mandatory when you invest in mutual funds. For Know Your Customer (KYC) process, you need to know:
- Validated KYC: Completed with an Aadhaar card; no restrictions on investments.
- Registered KYC: Without Aadhaar, it only allows redemption of existing investments, not new ones.
- On-hold KYC: No investments allowed, only redemptions.
Therefore, you will need to complete your KYC properly. Always use updated documents for a seamless investing experience.
4. Select the Right Investment Method For Yourself
There are two main ways to invest in mutual funds in India:
- Lump Sum: A one-time investment. In this, you invest a large amount upfront. A lump sum is ideal for those with readily available funds.
- Systematic Investment Plan (SIP): Investment of smaller amounts at regular intervals, like monthly deductions. SIP is perfect for building wealth over time.
5. Create a Balanced and Diversified Portfolio
A diversified portfolio works wonders, as they help to balance risk and return effectively. See how you need to go about it:
- Risk Appetite: Align your fund selection with your risk tolerance.
- Diversification: Spread your investments across different mutual fund types (e.g., equity, debt, hybrid).
- Balance: Offset high-risk investments with low-risk options to stabilize returns.
This approach is very good for maximizing your returns and greatly minimizing potential losses.
Summing Up!
So, keep this step-by-step guide by your side when you’re about to start the investing process. Invest in mutual funds with these hassle-free tips with utmost confidence. Keep up with the process, and do not miss a single precaution while you do so. Happy Investing!
