Mutual Funds In India: Steps To Invest Directly

Investing in mutual funds has become an increasingly popular choice for retail investors in India. Mutual funds offer a range of benefits, including risk diversification, professional management, tax benefits, and liquidity. Before investing, it is important to understand how mutual funds work and why one should invest in them. This involves knowing the different types of mutual funds, such as equity, debt, and hybrid funds, and the associated risks and returns.

When considering investing in mutual funds, individuals can choose between investing directly or through an intermediary, such as a distributor or agent. Investing directly in mutual funds offers the advantage of potentially higher returns due to lower expense ratios and the absence of distributor commissions. This route provides investors with greater control and transparency over their investment decisions.

To invest directly in mutual funds in India, individuals can choose between online and offline modes. The online mode involves selecting a reputable platform or the website of the Asset Management Company (AMC) managing the desired mutual fund. Individuals then need to register, complete the Know Your Customer (KYC) process, link their bank account, explore available mutual funds, and make their investment selections. The offline mode involves physically visiting the fund house or registrar office, collecting and filling out the necessary application forms, submitting KYC documents, and making payments via cheque or demand draft.

Know Your Customer (KYC) requirements

Know Your Customer (KYC) is a critical process for investing in mutual funds in India. It is a regulatory requirement by the Securities and Exchange Board of India (SEBI) to ensure transparency, compliance, and security in the financial system. The KYC process involves submitting specific documents and details to verify an investor's identity and address. Here are the essential aspects of the KYC requirements:

Documents and Details:

• Recent passport-sized photograph: A clear and recent photograph is necessary for documentation and record-keeping.
• Proof of Identity (PoI): Investors need to provide a copy of their PAN (Permanent Account Number) card, which serves as the primary identification document. Other acceptable identity proofs include Aadhaar card, passport, voter ID, driving license, etc.
• Proof of Address (PoA): Investors must submit address proof, such as Aadhaar card, passport, voter ID, bank statements, utility bills, or any other valid government-issued address proof. The address should match the details provided in the application form.
• KYC Form: Investors are required to fill out and submit the KYC form, providing details such as name, address, contact information, and financial information. This form is crucial for regulatory compliance.
• Bank Account Details: Investors need to provide their bank account number, IFSC code, and a cancelled cheque leaf to verify the accuracy of the bank details.
• Additional Documents: In some cases, investors may need to provide income proof, such as salary slips or income tax returns. If the investor is a minor, the guardian's KYC compliance and details are required. For non-individual investors (HUFs, trusts, companies, etc.), additional documentation like trust deeds or partnership deeds may be necessary.

Online and Offline KYC Process:

The KYC process can be completed online or offline. Online KYC involves registering on a chosen platform, submitting documents and details digitally, and receiving a KYC identification number. Offline KYC requires downloading and filling out the KYC application form, attaching the necessary documents, and submitting them to the desired mutual fund house or intermediary.

Aadhaar-Based KYC:

While providing Aadhaar for KYC is optional, it is a preferred method for many investors. Starting from the 2024-25 fiscal year, SEBI regulations mandate that mutual fund investors update their KYC information with their Aadhaar to purchase new mutual fund units. This ensures verified identities and reduces the risk of fraudulent activities.

KYC Status and Validation:

Investors can check their KYC status by visiting the website of the KYC Registration Agency (KRA) where they completed their registration. They can then navigate to the 'Check KYC Status' or similar section and enter their PAN or other identifying details. The website will display the KYC status, such as verified, under process, or rejected.

Central KYC (CKYC):

CKYC is a new initiative by the Government of India to streamline the KYC process. With CKYC, investors only need to complete their KYC once before interacting with various entities in the financial sector. The CKYC form requires additional information, such as the investor's maiden name and mother's name. Once CKYC is completed, a 14-digit KYC Identification Number (KIN) is allotted to the investor, which they must mention when accessing their CKYC details.

Choose a platform

When it comes to choosing a platform for investing in direct mutual funds, you have two primary options: the offline mode and the online mode. Each mode has its own set of advantages and procedures. Here's a detailed guide to help you make an informed decision:

Offline Mode

The offline mode of investing in direct mutual funds involves a more traditional approach. Here are the steps you need to follow:

• Visit the nearest office of the Asset Management Company (AMC) or the Registrar and Transfer Agent (RTA) associated with the mutual fund you want to invest in. You can usually find their physical location on the official website of the mutual fund.
• Collect and fill out an application form for investing in direct mutual funds. This form will contain essential details and terms related to your investment.
• Provide accurate information in the application form, including your personal details, investment amount, choice of mutual fund scheme, and mode of investment (lump sum or Systematic Investment Plan – SIP).
• Attach the necessary Know Your Customer (KYC) documents, such as a PAN card, Aadhar card or other address proof, and passport-sized photographs. Make sure your KYC process is complete, as it is mandatory for investing in mutual funds.
• Make the payment for your investment using a cheque or demand draft in favour of the mutual fund scheme you are investing in.
• Submit the completed application form, along with the cheque or demand draft, to the designated collection centre at the AMC or RTA office.
• You will receive a confirmation of your investment, including details such as the number of units allocated and the Net Asset Value (NAV) at which the units were purchased.
• Periodically check your physical account statements, which will be mailed to your registered address. These statements will provide an overview of your investments and any changes in your portfolio.
• Keep track of your investments and periodically review their performance. If needed, you can visit the AMC or RTA office for assistance or updates.

Online Mode

The online mode offers a convenient and user-friendly approach to investing in direct mutual funds. Here are the steps to follow:

• Choose a reputable online mutual fund app or a fund house's website to invest in direct mutual funds. Ensure the platform is reliable, user-friendly, and provides all the necessary information. Examples of popular platforms include Kuvera, Groww, Zerodha Coin, ET Money, Paytm Money, and ICICI Direct.
• Create an account on the chosen platform by providing personal details, completing the KYC process, and linking your bank account. Some platforms may offer paperless or Aadhar-based e-KYC for a quicker process.
• Explore the available direct mutual funds and evaluate their past performance, fund manager expertise, expense ratio, and investment strategy to make informed decisions.
• Choose the mutual funds that align with your financial goals, risk tolerance, and investment horizon.
• Specify the investment amount and choose between a lump sum investment or set up a SIP for regular monthly investments.
• Make the payment using your linked bank account. Online platforms typically offer various payment options, including net banking, UPI, and debit cards.
• Once the transaction is complete, you will receive a confirmation. Keep track of your investments through periodic statements provided by the platform.
• Regularly monitor the performance of your mutual fund investments. You may need to review and rebalance your portfolio based on changing market conditions and your financial goals.

Both the offline and online modes have their own advantages. The offline mode may be preferred by those who are uncomfortable with online transactions or prefer a more traditional approach. On the other hand, the online mode offers convenience, ease of transactions, access to various mutual fund schemes, and real-time updates on Net Asset Value (NAV).

Registration

Online Registration

• Choose a Platform: Select a user-friendly and reputable online mutual fund app or the website of the fund house to invest with.
• Create an Account: Sign up by providing your personal details, such as your name, email address, and mobile number. You will also need to submit your Know Your Customer (KYC) information, which includes a recent passport-sized photograph, proof of identity (e.g. PAN card, passport), and proof of address (e.g. Aadhaar card). Some platforms offer paperless or Aadhaar-based e-KYC for faster completion.
• Link your Bank Account: Connect your bank account to facilitate investments and receive redemption proceeds.

Offline Registration

• Visit the Fund House or Registrar Office: Locate the physical office of the fund house or the registrar and transfer agent (RTA) associated with your chosen mutual fund.
• Collect and Complete the Application Form: Request and fill out the application form with accurate information, including personal details, investment amount, choice of mutual fund scheme, and mode of investment (lump sum or Systematic Investment Plan – SIP).
• Attach KYC Documents: Provide copies of your KYC documents, such as a PAN card, Aadhaar card or other address proof, and passport-sized photographs, as per the requirements.
• Make Payment: Submit a cheque or demand draft for the investment amount, made out to the mutual fund scheme.
• Submit the Form: Hand in the completed application form, along with the cheque or demand draft, at the designated collection centre.

It's important to remember that the registration process may vary slightly depending on the platform or fund house you choose. Additionally, online registration offers the convenience of accessing various mutual fund schemes and utilising updated KYC details across different platforms.

Explore mutual funds

Before investing in mutual funds, it is important to explore the different types of funds available and select those that align with your financial goals, risk tolerance, and investment preferences. Here are some key considerations to keep in mind when exploring mutual funds:

• Performance and Track Record: Evaluate the past performance of the fund and its historical returns. Look for consistent performance over time, considering both short-term and long-term gains.
• Fund Manager Expertise: Assess the expertise and track record of the fund manager responsible for making investment decisions. Consider their experience, qualifications, and success rate in generating returns.
• Expense Ratio: The expense ratio represents the annual fees charged by the fund house for managing the mutual fund. Compare expense ratios across different funds, as lower expense ratios can result in higher overall returns.
• Investment Strategy: Understand the investment strategy and objectives of the mutual fund. Evaluate how the fund allocates its assets, selects securities, and manages risk. Ensure that the investment strategy aligns with your own financial goals and risk tolerance.
• Risk Factors: Different mutual funds carry varying levels of risk. Consider factors such as market volatility, industry-specific risks, and the fund's ability to mitigate potential losses. Diversifying your investments across multiple funds and asset classes can help reduce overall risk.
• Returns and Dividends: Assess the potential returns offered by the mutual fund, including dividends and capital gains distributions. Compare the expected returns with your investment goals and risk appetite.
• Liquidity: Consider the liquidity of the mutual fund, which refers to how easily you can buy or sell units of the fund. Open-ended mutual funds, for example, offer more flexibility in purchasing and redeeming units compared to closed-ended funds.

When exploring mutual funds, you can utilise various resources such as online platforms, financial websites, and investment advisors to gather information, compare different funds, and make informed decisions. It is essential to conduct thorough research and due diligence before investing your money.

Investment selection

The selection of a mutual fund for investment is a critical step in the process. It requires careful consideration and evaluation to ensure that the chosen fund aligns with your financial goals, risk tolerance, and investment preferences. Here are some key factors to keep in mind when selecting a mutual fund for investment:

• Investment Goals: Identify your financial objectives and invest in funds that align with those goals. For example, if you are investing for the long term, consider funds that focus on capital appreciation. If you seek regular income, look for funds that generate steady returns.
• Risk Tolerance: Different mutual funds carry varying levels of risk. Assess your risk tolerance and choose funds that match your comfort level. Consider factors such as your investment horizon, financial situation, and ability to withstand potential losses.
• Fund Performance: Evaluate the historical performance of the mutual fund. Look at its returns over different time periods to gauge its consistency and compare it with similar funds to identify top-performing options.
• Fund Manager Expertise: The fund manager plays a crucial role in the success of a mutual fund. Assess their track record, investment strategy, and experience in managing funds with similar objectives. A skilled and reputable fund manager can positively impact the fund's performance.
• Expense Ratio: The expense ratio represents the annual fees charged by the fund house for managing the mutual fund. Higher expense ratios can eat into your returns. Compare the expense ratios of different funds to find more cost-effective options.
• Investment Strategy: Understand the investment strategy and approach of the mutual fund. Evaluate how the fund selects securities, manages risk, and adapts to market conditions. Ensure that the investment strategy aligns with your goals and risk tolerance.
• Diversification: Diversification across asset classes, sectors, and investment styles can help mitigate risk. Look for funds that diversify their investments to reduce the impact of any single security or sector on the overall portfolio.
• Portfolio Components: Analyse the portfolio holdings of the mutual fund. Assess the quality and mix of securities, including stocks, bonds, and other financial instruments. Ensure that the portfolio aligns with your investment objectives and risk appetite.
• Assets Under Management: Consider the size of the fund and the assets under its management. Larger funds may have more resources and negotiating power, while smaller funds might offer more specialised strategies.
• Fund Credentials: Research the credentials and reputation of the fund house and the fund manager. Assess their track record, regulatory compliance, and any awards or recognition they have received. This information can provide insights into the fund's reliability and performance.

It is important to remember that mutual fund selection is a personalised process, and the above factors should be considered in the context of your unique financial situation and goals. Conduct thorough research, seek expert advice if needed, and diversify your investments across different funds to manage risk effectively.

Frequently asked questions