Learn How to invest in mutual funds in India: Mutual funds are one of the most popular and convenient ways to invest in the stock market.
Mutual funds are one of the most popular and convenient ways to invest in the stock market. They offer several benefits such as diversification, professional management, liquidity, and tax efficiency. However, investing in mutual funds can also be confusing and overwhelming for beginners.
There are thousands of mutual funds to choose from, each with different objectives, strategies, risks, and returns. How do you decide which mutual fund is right for you? How do you start investing in mutual funds in India? In this blog post, we will answer these questions and guide you through the basics of mutual fund investing.
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What are Mutual Funds?
A mutual fund is a pool of money collected from many investors and invested in various securities such as stocks, bonds, gold, etc. by a professional fund manager. The fund manager selects the securities according to the investment objective and strategy of the mutual fund.
The investors share the profits or losses of the mutual fund in proportion to their investment amount. Each investor owns a certain number of units of the mutual fund, which represent their share of the fund’s assets. The value of each unit is called the net asset value (NAV), which is calculated by dividing the total value of the fund’s assets by the number of units outstanding.
Why Invest in Mutual Funds?
Investing in mutual funds has several advantages over investing directly in the stock market. Some of the main reasons to invest in mutual funds are:
Diversification
Mutual funds invest in a large number of securities across different sectors, industries, and geographies. This reduces the risk of losing money due to the poor performance of a single security or a specific market segment. Diversification also increases the chances of earning higher returns by capturing the growth potential of various markets and sectors.
Professional Management
Mutual funds are managed by qualified and experienced fund managers who have access to in-depth research, analysis, and market insights. They monitor the performance of the securities in the portfolio and make timely changes according to the market conditions and the fund’s objective.
They also take care of the administrative and operational aspects of investing such as buying and selling securities, collecting dividends and interest, and maintaining records and reports. This saves the investors time and effort and allows them to focus on their core activities.
Liquidity
Mutual funds are easy to buy and sell. Investors can purchase or redeem their units at the prevailing NAV, subject to certain charges and conditions. Most mutual funds offer daily liquidity, which means that investors can get their money back within a few days of placing their request. Some mutual funds also offer instant redemption, which allows investors to get their money back within minutes through online platforms or mobile apps.
Tax Efficiency
Mutual funds offer various tax benefits to investors depending on the type and duration of the investment. For example, equity mutual funds, which invest at least 65% of their assets in stocks, are eligible for long-term capital gains tax exemption if held for more than one year. Similarly, debt mutual funds, which invest in fixed-income securities such as bonds and treasury bills, are eligible for indexation benefit, which reduces the tax liability by adjusting the cost of investment for inflation. Moreover, some mutual funds such as equity-linked savings schemes (ELSS) and pension funds also offer tax deductions under Section 80C of the Income Tax Act, 1961.
How to Invest in Mutual Funds in India?
Investing in mutual funds in India is simple and convenient. You can invest in mutual funds through online or offline modes. Here are the steps to invest in mutual funds in India:
Choose your investment goal and risk profile
Before investing in mutual funds, you need to identify your investment goal and risk profile. Your investment goal is the specific financial objective that you want to achieve through your investment, such as saving for retirement, buying a house, or funding your child’s education. Your risk profile is the level of risk that you are willing and able to take with your investment, which depends on factors such as your age, income, expenses, liabilities, and financial knowledge. Based on your investment goal and risk profile, you can choose the type and duration of the mutual fund that suits your needs.
Select the mutual fund scheme
Once you have decided your investment goal and risk profile, you need to select the mutual fund scheme that matches your criteria. You can choose from various types of mutual funds such as equity, debt, hybrid, sectoral, thematic, index, etc. You can also choose from various categories of mutual funds such as large-cap, mid-cap, small-cap, multi-cap, etc. based on the market capitalization of the stocks in the portfolio. You can compare the performance, risk, return, expense ratio, portfolio composition, and fund manager’s track record of different mutual fund schemes and select the one that meets your expectations and requirements.
Complete the KYC process
To invest in mutual funds, you need to complete the know-your-customer (KYC) process, which involves verifying your identity and address. You can complete the KYC process online or offline by submitting the following documents:
- A copy of your PAN card
- A copy of your Aadhaar card or any other proof of address such as passport, driving license, voter ID, etc.
- A recent passport-sized photograph
- A cancelled cheque or a copy of your bank statement
You can also use your Aadhaar number to complete the e-KYC process online through the websites or apps of mutual fund houses or intermediaries. The e-KYC process is faster and easier than the offline process, but it has a limit of Rs. 50,000 per year per mutual fund house.
Fill the application form and make the payment
After completing the KYC process, you need to fill the application form of the mutual fund scheme that you have selected. You can fill the application form online or offline by providing the following details:
- Your name, address, PAN, Aadhaar, and bank account details
- The name, code, and plan of the mutual fund scheme
- The amount and mode of investment (lump sum or systematic)
- The nomination and declaration details
You can make the payment for your investment online or offline by using any of the following modes:
- Net banking
- Debit card
- Credit card
- UPI
- NEFT
- RTGS
- Cheque
- Demand draft
Receive the confirmation and statement of account
After making the payment, you will receive a confirmation email or SMS from the mutual fund house or intermediary. You will also receive a statement of account, which shows the details of your investment such as the number of units allotted, the NAV, the amount invested, the date of allotment, etc. You can also check the status of your investment online through the websites or apps of mutual fund houses or intermediaries.
What are some common mistakes to avoid while investing in mutual funds?
Some common mistakes to avoid while investing in mutual funds are:
- Chasing performance: This means investing in the top-performing funds of the previous year or period, hoping that they will continue to do well. However, this strategy often fails, as the performance of mutual funds can change due to various factors such as market conditions, fund manager’s decisions, and portfolio rebalancing. Instead of chasing performance, investors should focus on their investment goals, risk profile, and time horizon, and choose the funds that suit their criteria.
- Not diversifying the portfolio: This means investing in only one or a few mutual funds, or investing in funds that have similar or overlapping holdings. This exposes the investors to higher risk, as any negative event affecting the fund or its underlying securities can result in significant losses. To reduce the risk, investors should diversify their portfolio across different types of mutual funds, such as equity, debt, hybrid, sectoral, thematic, index, etc., and across different categories, such as large-cap, mid-cap, small-cap, multi-cap, etc.
- Not doing enough research: This means investing in mutual funds without understanding their objectives, strategies, risks, returns, expense ratio, portfolio composition, and fund manager’s track record. This can lead to investing in unsuitable or underperforming funds, or missing out on better opportunities. Investors should do their homework and compare the features and performance of different mutual funds before investing in them. They can also use online platforms or apps that provide reliable and updated information and analysis on mutual funds.
- Reacting emotionally: This means making investment decisions based on emotions such as fear, greed, or regret, rather than logic and rationality. For example, some investors may panic and sell their mutual funds when the market is down, or buy more when the market is up, without considering the long-term implications. This can result in buying high and selling low, which erodes the returns. Investors should avoid emotional reactions and stick to their investment plan, unless there is a change in their goals or circumstances. They should also review their portfolio periodically and make adjustments if needed.
These are some of the common mistakes that investors make while investing in mutual funds. By avoiding these mistakes, investors can improve their chances of achieving their financial goals through mutual funds.
How are mutual funds taxed in India?
Mutual funds are taxed in India based on their type and holding period. The type of mutual fund determines the applicable tax rate and the holding period determines whether the gains are classified as short-term or long-term. The following table summarizes the tax treatment of mutual funds in India:
| Type of Mutual Fund | Holding Period | Tax Rate |
|---|---|---|
| Equity funds | Less than 1 year | 15% |
| Equity funds | More than 1 year | 10% (if gains exceed 1 lakh) |
| Debt funds | Less than 3 years | As per income tax slab |
| Debt funds | More than 3 years | 20% with indexation |
| Hybrid funds | Depends on the equity-debt ratio | As per the above rules |
| Index funds | Same as equity funds | Same as equity funds |
| Sector funds | Same as equity funds | Same as equity funds |
| Tax-saving funds | 3 years (lock-in period) | Same as equity funds |
In addition to the above tax rates, surcharge and cess are also applicable as per the income tax rules.
Source: https://www.forbes.com/advisor/investing/how-to-invest-in-mutual-funds/
Frequently Asked Questions (FAQs)
What are mutual funds?
A mutual fund is an investment platform that pools money from several investors and invests these funds in various financial securities like stocks, bonds, gold, etc. Mutual funds are run by professional fund managers who allocate these funds to generate returns or capital gains for the investors.
How to invest in mutual funds online?
There are two ways to invest in mutual funds online: through the official website of the fund house or through a mobile app. You need to create an account, complete the KYC process, select the mutual fund scheme, and make the payment. You can also track your portfolio, buy or sell units, and check other details through the online mode.
How to choose the right mutual fund for your portfolio?
The right mutual fund for your portfolio depends on your investment goals, risk appetite, time horizon, and asset allocation. You should consider factors such as the fund’s performance, expense ratio, exit load, fund manager’s experience, and investment style. You should also diversify your portfolio across different fund categories and sectors to reduce risk and optimize returns.
What are the benefits of investing in mutual funds?
Some of the benefits of investing in mutual funds are:
- You can start with any amount (as low as 500)
- You can diversify across multiple stocks and other instruments
- You can start automated monthly investments (SIP)
- You can invest without requiring to open a DEMAT account
- You can access professionally managed portfolios of securities
- You can enjoy tax benefits under Section 80C.
What are the types of mutual funds?
Mutual funds can be classified into various types based on their asset class, structure, investment objective, and risk profile. Some of the common types of mutual funds are:
- Equity funds: These funds invest predominantly in stocks and aim to generate high returns in the long term. They are suitable for investors with a high-risk appetite and a long-term horizon.
- Debt funds: These funds invest mainly in fixed-income securities like bonds, treasury bills, corporate debentures, etc. They aim to provide regular income and capital preservation. They are suitable for investors with a low-risk appetite and a short-term to medium-term horizon.
- Hybrid funds: These funds invest in a mix of equity and debt securities and aim to balance risk and return. They are suitable for investors with a moderate-risk appetite and a medium-term to long-term horizon.
- Index funds: These funds replicate the performance of a specific index like Nifty or Sensex by investing in the same stocks in the same proportion. They have low costs and low tracking error. They are suitable for investors who want to invest passively in the market.
- Sector funds: These funds invest in a particular sector of the economy like banking, IT, pharma, etc. They have high potential returns but also high sector-specific risks. They are suitable for investors who have a high-risk appetite and a strong conviction about a sector.
- Tax-saving funds: These funds invest mainly in equity securities and offer tax benefits under Section 80C of the Income Tax Act. They have a lock-in period of three years. They are suitable for investors who want to save tax and earn high returns in the long term.
What is SIP and how does it work?
SIP stands for Systematic Investment Plan and is a mode of investing in mutual funds. SIP allows you to invest a fixed amount of money at regular intervals (monthly, quarterly, etc.) in a mutual fund scheme of your choice. SIP helps you to benefit from the power of compounding, rupee cost averaging, and disciplined investing. SIP also reduces the impact of market fluctuations and lowers the entry barrier for investing.
What is NAV and how is it calculated?
NAV stands for Net Asset Value and is the per-unit price of a mutual fund. NAV is calculated by dividing the total value of the fund’s assets minus the fund’s liabilities by the number of outstanding units. NAV is declared by the fund house at the end of every business day and reflects the performance of the fund. NAV is used to buy or sell units of a mutual fund.
What are the charges involved in investing in mutual funds?
Some of the charges involved in investing in mutual funds are:
- Entry load: This is a charge levied by the fund house when you buy units of a mutual fund. However, SEBI has abolished entry load for mutual funds since 2009.
- Exit load: This is a charge levied by the fund house when you sell units of a mutual fund within a specified period. Exit load is usually a percentage of the redemption value and varies from fund to fund.
- Expense ratio: This is the annual fee charged by the fund house for managing and operating the mutual fund. Expense ratio includes management fees, administrative costs, marketing expenses, etc. Expense ratio is deducted from the fund’s NAV and affects the fund’s returns.
- Transaction charges: These are the charges levied by the distributor or intermediary for facilitating the investment in mutual funds. Transaction charges are applicable only for investments above 10,000 and are deducted from the investment amount.
What are the risks involved in investing in mutual funds?
Investing in mutual funds involves various risks such as:
- Market risk: This is the risk of losing money due to fluctuations in the market prices of the securities held by the fund. Market risk is influenced by factors such as economic conditions, political events, corporate earnings, etc.
- Credit risk: This is the risk of default or delay in payment by the issuer of the debt securities held by the fund. Credit risk is influenced by factors such as the credit rating, financial health, and liquidity of the issuer.
- Interest rate risk: This is the risk of losing money due to changes in the interest rates in the economy. Interest rate risk affects the value of the debt securities held by the fund inversely. When interest rates rise, the value of debt securities falls and vice versa.
- Liquidity risk: This is the risk of not being able to sell the units of the fund at the desired price and time. Liquidity risk is influenced by factors such as the demand and supply of the units, the size and turnover of the fund, the market conditions, etc.
- Concentration risk: This is the risk of losing money due to overexposure to a particular security, sector, or theme. Concentration risk reduces the diversification benefits of the fund and increases the volatility of the returns.
- Currency risk: This is the risk of losing money due to changes in the exchange rates of foreign currencies. Currency risk affects the value of the international or global funds that invest in securities denominated in foreign currencies.
Disclaimer: This blog provides general information on mutual fund investing and is not intended as legal, financial, or investment advice. The content is for educational purposes only and the mutual fund schemes mentioned are just examples. All investments come with risks and it is advised to consult a financial advisor before making actual investments. The writer or publisher does not guarantee the accuracy of the content and does not accept any liability for losses incurred by readers acting upon the information provided here.
