A Guide To Investing In India's Thriving Funds Market

Investing in funds in India can be a complicated process, but it is becoming an increasingly popular option for individual investors. Mutual funds are a common investment choice, where money from several investors is pooled and invested in various financial securities, such as bonds, stocks, shares, and money market instruments. These funds are managed by professionals, allowing small investors to access a diverse portfolio of stocks, bonds, and other securities. When investing in mutual funds, it is important to consider the fees, including the expense ratio and net asset value (NAV). Additionally, investors should be aware of the different types of mutual funds available, such as equity-oriented funds, debt funds, and tax-saving funds like ELSS (Equity Linked Savings Scheme). Before investing, individuals should assess their risk profile and ensure that their investments align with their financial goals and risk tolerance.

Mutual funds: invest with any amount, diversify across stocks, automate monthly investments, and avoid a DEMAT account

Mutual funds are a great way to invest in India, offering several benefits to investors. Here are some key advantages of investing in mutual funds:

Invest with any amount

Mutual funds allow investors to start with a small amount, such as INR 500, and build their investment portfolio over time. This makes mutual funds accessible to a wide range of individuals, regardless of their financial situation.

Diversify across stocks

Mutual funds enable investors to diversify their portfolio by investing in multiple stocks and other instruments like debt, gold, and more. This diversification is a crucial strategy to reduce risk and potentially generate higher returns. By investing in various industries and sectors, investors can lower the impact of any single investment on their overall portfolio.

Automate monthly investments

Mutual funds offer the convenience of automated monthly investments through a Systematic Investment Plan (SIP). This helps investors discipline their investment strategy by regularly investing a fixed amount in the mutual fund scheme of their choice. SIPs are an excellent way to invest small amounts regularly and benefit from the power of compounding.

Avoid a DEMAT account

Investing in mutual funds does not require a DEMAT account, making it easier for beginners to get started. A DEMAT account is a type of account used to hold securities in dematerialised form, and while it has its benefits, it also comes with additional costs and maintenance fees. By investing directly with the mutual fund house or through an online platform, individuals can avoid the need for a DEMAT account and still access a wide range of investment opportunities.

Building a portfolio: understand the basics of building a mutual fund portfolio

Building a portfolio involves creating a collection of mutual funds that help you meet your investment goals. Here are the basics of building a mutual fund portfolio:

Start with your goals

Understand your financial goals and risk appetite. Are you saving for retirement, your child's education, a house down payment, or something else? Each goal will have a different timeline and expected returns. Tag each mutual fund to a specific goal, ensuring that your asset allocation aligns with your goals. For example, you might allocate equity funds to long-term goals and debt funds to short and medium-term goals.

Understand the Systematic Investment Plan (SIP) approach

The SIP approach to investing is highly recommended due to its focus on discipline, which is core to creating a long-term mutual fund portfolio. SIPs match your investment allocations to your cash flows, ensuring you don't face cash flow mismatches. They also offer the benefit of rupee cost averaging, where you gain more value when markets are up and more units when markets are down.

Do your research

It's essential to do your homework before investing in mutual funds. Choose funds that align with your goals and risk tolerance. Understand the different types of funds available, such as equity funds, debt funds, large-cap funds, flexicap funds, and more. Consider factors like past returns, growth options, and direct vs. regular options.

Diversify your portfolio

Consider splitting your portfolio into core and satellite holdings. The core portfolio is aligned with your long-term and medium-term goals and is generally not disturbed unless rebalancing is required. The satellite portfolio is opportunistic and aims for higher returns. It can include sector funds, index funds, gold funds, thematic funds, and credit opportunity funds.

Monitor and rebalance your portfolio regularly

Regularly review your fund holdings, measuring their performance against your goals. You may need to scale up or down your exposure based on market conditions. Ensure your core portfolio remains in sync with your goals and consistently performs well against the index or peer group.

By following these steps, you can build a mutual fund portfolio that effectively supports your financial goals and helps you achieve your investment objectives.

Investing in mutual funds: learn about the process, and the importance of KYC

Mutual funds are an increasingly popular investment vehicle in India, providing a range of benefits to investors. They are an investment platform that pools money from multiple investors and invests these funds in various financial securities such as bonds, stocks, shares, money market instruments, and gold. The funds are managed by investment professionals who allocate the pooled capital to generate revenue or capital gains for the investors.

Process of Investing in Mutual Funds

When investing in mutual funds, it is essential to build a portfolio, which is a collection of mutual funds that align with your investment goals. The performance of your investments is dependent on the overall performance of your portfolio rather than individual funds.

For first-time investors, the process of investing in mutual funds can seem complicated. However, with the right knowledge, it can be a straightforward process. Here are the key steps to investing in mutual funds:

• Know Your Customer (KYC): Before investing in mutual funds, investors are required to complete the KYC process, which is mandated by the Reserve Bank of India (RBI) for all financial institutions. This involves verifying the identity and address of the customer. There are two types of KYC verification: Aadhar-based KYC, which is done online, and in-person based KYC, which is done offline. The KYC process is a one-time requirement and can be completed through online or offline modes.
• Choosing the Right Mutual Funds: Investors need to select the suitable mutual funds for their portfolio, considering their investment goals, risk appetite, and time horizon. Different types of mutual funds are available, such as equity funds, debt funds, balanced funds, and gold funds, each with its own characteristics and risk-return profile.
• Investing Through a Systematic Investment Plan (SIP): Investors can start investing in mutual funds through a SIP, which allows them to make regular, automated monthly investments. This helps in rupee-cost averaging and makes investing more accessible, as one can start with a small amount.
• Understanding the Jargon: Mutual funds come with their own set of terminology, and it is essential for investors to familiarise themselves with these terms. This includes understanding concepts like asset allocation, fund managers, net asset value (NAV), lock-in periods, and exit load, among others.
• Diversification: One of the benefits of mutual funds is the ability to diversify across multiple stocks, debt instruments, and other assets. This helps to spread risk and potentially enhance returns.
• Monitoring and Reviewing: Investors should regularly monitor the performance of their mutual fund investments and review their portfolio periodically. This helps ensure that the investments are aligned with their financial goals and risk tolerance.

Importance of KYC

KYC, or "Know Your Customer," is a critical aspect of investing in mutual funds and plays a significant role in combating financial crime and money laundering. It is mandated by the RBI as the only mode of verification for financial institutions. The process helps confirm the authenticity of customers, including their identity, address, and financial history.

KYC is particularly important in the context of mutual fund investments as it helps prevent illegal activities and ensures that the money being invested does not have any connection to money laundering or other illicit activities. It also enables banks to verify the legal status of entities, cross-check operating addresses, and verify the identities of beneficial owners and authorised signatories.

By complying with KYC regulations, financial institutions can limit fraud and protect themselves from heavy penalties for non-compliance. The KYC process is a one-time requirement, and once completed through a SEBI-registered intermediary, investors do not need to undergo the same process again when approaching other financial institutions.

Important considerations: exit load, expense ratio, and other essential jargon

When investing in mutual funds in India, there are several important considerations to keep in mind, including exit load, expense ratio, and other essential jargon.

Exit Load

The exit load is a fee charged when you withdraw your money from a mutual fund. It is usually applied to specific schemes and can be as high as 1% for some projects. When investing in mutual funds, it is essential to consider the potential costs associated with withdrawing your investment.

Expense Ratio

The expense ratio is the money you pay each year to the fund house for managing your investment, expressed as a percentage of your investment. This is an important consideration as it directly impacts your returns. When comparing different mutual funds, be sure to factor in the expense ratio to understand the actual returns you can expect.

Net Asset Value (NAV)

Net Asset Value (NAV) is another crucial factor to understand. It refers to the value per share of a mutual fund or an exchange-traded fund (ETF) on a specific date or time. NAV is essential in determining the worth of your investment and making informed decisions about buying or selling.

Other Essential Jargon

• Asset Management Company (AMC): The company that runs a mutual fund, such as HDFC Mutual Fund or ICICI Prudential Mutual Fund.
• Arbitrage Funds: A type of mutual fund that invests in equity securities while also taking an opposite position in derivatives, resulting in returns similar to liquid funds.
• Asset Allocation: The process of allocating your funds across different assets, such as equity, debt, or gold.
• Large Cap, Mid Cap, and Small Cap: These terms refer to the market capitalization of the companies a mutual fund invests in. For example, a large-cap fund invests in companies with a market cap of ~20,000 Cr or more.
• Systematic Investment Plan (SIP): A way of regularly investing money in mutual funds, typically on a monthly basis.
• Growth Plan: A type of mutual fund where any dividends paid are reinvested for further growth.
• Fund Manager: The person who decides where to invest the money in the mutual fund, significantly impacting the fund's performance.
• Gilt Funds: Mutual funds that invest only in government bonds, suitable for risk-averse investors.
• Gold Funds: Mutual funds that invest in various forms of gold, such as physical gold or stocks of gold mining companies.

Understanding these terms and considerations is crucial when investing in mutual funds in India. It enables you to make informed decisions, align your investments with your financial goals, and potentially maximize your returns while managing risks effectively.

Tax-saving funds: learn about ELSS and how to save tax through mutual funds

ELSS stands for Equity Linked Savings Schemes. ELSS funds are a type of Equity Mutual Fund that offers tax-saving benefits under Section 80C of the Income Tax Act. Investments made into ELSS funds provide tax deduction benefits of up to Rs. 1.5 lakh on the cumulative limit of Section 80C in a financial year. ELSS funds are also called tax-saving schemes as they offer tax exemptions.

ELSS funds are similar to diversified multi-cap equity funds in almost all respects apart from the 3-year lock-in period. ELSS funds invest primarily in the stocks of various companies irrespective of their operational sector or market cap. The minimum amount of equity holding that ELSS funds need to maintain is 65% of assets, while the remainder may be invested in fixed-income instruments like bonds or various money market instruments.

Who should invest in ELSS funds?

As ELSS funds are market-linked equity-oriented schemes, there is a significant risk of short-term volatility. However, ELSS funds have the potential to provide returns that are significantly higher than inflation in the long term. You should consider investing in ELSS funds only if you are seeking to reduce your tax burden, have a high level of risk tolerance, and are planning to stay invested for the long term (5 years or more).

There are several ways to invest in ELSS funds:

• Invest through online mutual fund investment platforms.
• Invest through an existing demat account.

Frequently asked questions