How to invest in mutual fund: Follow these 6 brilliant steps

Just a few days back, I had an inquiry from one person who was looking forward to investing in mutual funds, for the first time.

Apart from asking general questions like how to invest in mutual fund , he asked me very interesting questions.

He inquired about one famous mutual fund product that is consistently paying out dividends on a monthly basis.

He was straight in asking, Yashpal, are dividends guaranteed in this fund ?

And one more question, I heard my capital is completely safe in this fund, is it true?

I was a bit shocked by these questions, because dividends are declared only if a company makes any profit and it is completely at the discretion of the company board to declare a dividend or not.

So, it can never be said monthly dividend is guaranteed forever.

Answer to the second question, any mutual fund product is subject to market risk, so in the short run you may even witness capital loss.

Instead of answering his questions, I counter questioned him, sir who provided you information about this product.

As usual I found another case of mis-selling. I would not name who told him because it is not so important.

Important thing is, mis-selling of financial products is a very big issue in India.

And apart from greed, another reason I found for mis selling is lack of basic awareness about mutual funds.

I found some people investing in mutual funds just because their friend invested in it.

In my career as a finance advisor, I have tried to educate as many first time mutual funds investors as possible.

But everyday, I happen to meet one more first timer in a mutual fund.

So, in order to educate more people I thought of writing a post on it.

If you are a first time mutual fund investor or looking for help in choosing the right mutual fund, this post is for you.

By the end of this post, I am damn sure you will have a basic idea about mutual funds.

I will let you know how to invest in mutual fund and how to choose which mutual fund is right for you.

So, Before investing, first make it clear,

Before reaching to how to invest in mutual funds, don’t you think first you should have a clear idea of what a mutual fund is?

We will try to understand it with easy examples without changing its actual meaning. Because, definitions are in general very boring.

Basically, a mutual fund is a pool of money created by many small investors like us.

Out of that pool of money, money is invested in the stock market, debt market or gold by experienced fund managers.

To make things easy, just imagine you are directly investing your 1 lakh rupees in the stock market.

While in a mutual fund, just think how big an investment amount would be if 10 thousand people invested 1 lakh rupees each !

Benefits of such a big amount?

With 1 lakh rupees invested by yourself in a company, you will have nothing saying in it even if the company doesn’t perform well.

But, with a big amount like 100 crore mutual funds can put performance pressure on a company on behalf of all small unit holders like you.

Mutual funds are managed by seasoned funds managers. They are experts in investment strategies in the stock market, debt market or gold.

If you are totally new to the stock market, it is best in your interest to take advantage of their services by investing in mutual funds.

Mutual funds charge you fees for all these benefits. Fees charged are roughly around 1% to 2% per annum of your amount invested.

Types of mutual funds in India

It is a vast topic in itself and deserves separate posts for each and every type of mutual funds.

But to make it short, types of mutual funds are decided by various asset classes where mutual funds are investing money.

Like equity mutual funds, debt mutual funds, or gold funds.

Apart from these funds, there are many other types of mutual funds like index funds, balanced funds, money market funds.

I will write a separate post on various types of mutual funds in detail.

So, as you know now what is mutual fund, next important question is

Why to invest in mutual fund

I think I have already explained a few reasons why you should invest in mutual funds.

First, mutual funds provide the benefit of expertise of experienced fund managers who handle funds for you.

Second, as the fund size becomes big, we can say that alone we can achieve little: together we can do so much.

Another reason is, power of the equity market. If you check the history of the equity market, it creates a big amount of wealth in the long term.

But for that, you should be having clear idea about what is equity mutual fund.,

As you are well aware about mutual funds and why you should invest in it, we will see how you can invest in mutual funds.

You can either do it offline by visiting the office or you can do it conveniently over your smartphone.

Here, we will focus more on the later way. So,

How to invest in mutual fund online ?

Online is just an alternative route to invest in mutual funds for your convenience.

We will see about it but more important things you should be knowing is how to choose a mutual fund and complete KYC.

If you are a first timer, I would strongly recommend you to have a clear idea about the KYC process before investing in a mutual fund.

So, you should have a clear idea about how to do kyc in a mutual fund.

It is a one time process for investing in mutual funds and the stock market.

You can either complete it offline by visiting mutual fund offices or online over your smartphone.

You just need to visit any mutual fund company website or CAMS or KARVY and follow the instructions to complete KYC.

In online the same works for investing as well, you just need to follow instructions in online form to complete transactions.

But before doing it, it is very important to choose a suitable mutual fund product. So,

How to pick mutual funds

Picking mutual fund products is a very vast topic as it differs from person to person.

Because, all people can not have the same financial goals and risk appetite.

Your financial goal can be different from your friend, like having a car, buying a home, planning for marriage and retirement.

Same applies to your risk appetite, your friend or relative may be comfortable with more or less risk than you.

So, think about it, Does it make any sense that you invested in the same product, just because your friend did it?

First decide your own financial goal and risk profile then go further to choose a mutual fund product.

Now, you might be asking, in which mutual fund should I invest ?

There are almost 50 mutual fund houses in India and thousands of mutual fund schemes.

So, it becomes complicated, what to choose out of it.

In my opinion pick good rating products from rating agencies like Morning star, but do not get obsessed with just rating.

Look for other factors like fund size, experience of a fund manager, past performance may not sustain in future but it will help you know the quality of fund performance.

You can also look for top 10 companies where the fund is investing money.

While picking your product you would come across words like regular and direct fund.

What is a regular and direct mutual fund ?

Regular mutual fund

In a regular plan you invest your money in a mutual fund through any agent, let say any financial advisor or bank.

They help you in choosing a mutual fund for you. If you think you can not choose a mutual fund on your own, you can always invest in a mutual fund through them.

As they provide you service, they earn commission from your money, that makes your investment cost higher.

Direct mutual fund

If you are investing in a mutual fund directly through a mutual fund office, then it is called direct plan.

Even in your smartphone too you can purchase direct plans from mutual fund company websites, or through some online third party platforms that provide direct options.

If you are able to research and find a suitable mutual fund on your own then you can go for a direct plan.

As you are not getting service from an advisor you can save the commission you pay in a regular plan.

Is it right time to invest in mutual fund

In equity mutual funds, money is invested in the stock market. And the stock market goes up and down daily, based on sentiments.

From my experience, I have seen, it creates a general perception in the mind of people, what is the right time to invest in mutual funds then.

Well, you are investing in mutual funds with any long term goal in mind which may be 3 years, 5 years or 10 years away.

You are not investing your money for daily trading in the stock market.

So, you must not worry about daily price movement.

What all is expected from you is to keep disciplined investment till your pre decided time horizon.

If you check over all stock market returns, in 1 month, 6 month or 1 year, you will find so many ups and downs.

But if you check 3 years or 5 years returns, you will find that it is beating your fixed deposits returns.

If you are uncomfortable with little capital loss, then go for SIP to take advantage of averaging.

So, once you determine your financial goal and time horizon, any time is the right time to invest.

Best time for investing in the stock market was 15 years back and the next best time is today!

So, that’s everything about mutual funds you should be knowing before starting to invest. I think I have tried solving most of all the queries that are faced by beginners.

If you have more queries please let me know in the comments. Below I have solved some frequently asked questions by beginners.

Frequently Asked Questions

Which mutual fund is best to invest in India ?

If you are new to mutual funds, I would recommend starting with some big brand names of mutual funds that are performing well over the years. You can search different schemes of SBI mutual fund, Axis mutual fund, Nippon mutual fund, HDFC mutual fund.
Each fund house has some good quality high performing schemes in specific categories. You can choose any product after studying its past performance, fund manager and fund size. If you are already an investor then explore schemes of small but quality fund houses like Mirae AMC, Parag parekh or Sundaram mutual fund.

Are mutual funds safe ?

If you are asking about regulatory safety, then your money is in completely safe hands. Mutual funds in India are regulated by SEBI and SEBI is well reputed in safeguarding interests of small investors. If your safety concern is regarding market risk, then I would say first decide your finance goal and time horizon and select a mutual fund accordingly. Invest in mutual funds only if your investment horizon is minimum 3 years or longer.

Can I invest 100 rupees in mutual fund ?

Yes, you can start investing in a mutual fund with the smallest amount of 100 rupees through SIP route. But it differs from company to company. Some fund houses like Nippon provide a facility to start with SIP of minimum 100 rupees while others like in HDFC your minimum SIP amount should be 500. You can always find the minimum amount to invest in SIP or lumpsum by referring to the factsheet of any particular mutual fund company.

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Finance planner with experience in Equity market, Mutual funds and Insurance