Beginner's Guide To Mutual Funds In India: Where To Start?

Investing in mutual funds can be a great way to grow your money and achieve your financial goals. Mutual funds are a type of investment vehicle where multiple investors pool their money together, and this pooled money is then invested in various assets by a fund manager. The gains and losses from these investments are divided among the investors based on their share of investment.

One of the key advantages of investing in mutual funds is that your money is managed by professional fund managers who have years of investing experience. Mutual funds also offer superior liquidity compared to other investment instruments, as you can buy and sell them at any time. Historically, mutual fund returns have been higher than those of traditional investment options such as bank fixed deposits or recurring deposits.

Additionally, mutual funds provide diversification, which reduces risk by spreading your investments across different assets. This helps to mitigate the risk associated with investing in individual securities, as losses in some investments may be offset by gains in others.

To start investing in mutual funds, it is important to identify your investment goals, assess your risk tolerance, and determine your investment horizon. You should also consider factors such as the fund's performance, expense ratio, fund manager's expertise, and investment objective when selecting a mutual fund.

There are different ways to invest in mutual funds, including offline investment directly with the fund house, offline investment through a broker, and online investment through the fund house's website or mobile applications.

Before investing, it is crucial to complete the Know Your Customer (KYC) process, which is mandated by the government to prevent money laundering. This typically includes providing a valid PAN card and proof of address.

By following these steps and considerations, beginners can start their journey towards investing in mutual funds in India.

Set Clear Financial Goals

Setting clear financial goals is an important step in investing in mutual funds, especially for beginners. Here are some detailed instructions and considerations to help you set clear financial goals when investing in mutual funds in India:

Identify Your Financial Goals:

Before investing in mutual funds, it is crucial to identify your financial objectives. Ask yourself what you want to achieve through these investments. For example, are you saving for retirement, your child's education or marriage, a new car, or a home? Each of these goals has different time horizons and risk profiles, which will impact your investment strategy.

Determine Your Risk Tolerance:

Understanding your risk tolerance is essential when setting financial goals for mutual fund investments. Assess how comfortable you are with taking risks. If you are a beginner, you may want to start with lower-risk investments like balanced or debt funds, which offer stable returns. However, if you are willing to take on more risk, equity funds might be an option, as they have the potential for higher returns over the long term.

Estimate the Required Capital:

For each of your financial goals, estimate how much money you will need and when you will need it. This will help you determine the amount you need to invest and the timeframe for achieving your goal. For example, if you are saving for your child's education, factor in the cost of tuition, books, and other expenses. This will give you a target amount to work towards.

Create a Timeline:

Different financial goals have different timelines. Some goals, like saving for a car or a vacation, might have shorter timelines, while others, like retirement or your child's education, could be long-term goals. Creating a clear timeline for each goal will help you choose the appropriate investment vehicles and strategies.

Set Investment Milestones:

Break down your financial goals into smaller, achievable milestones. For example, if you are saving for a down payment on a house, set milestones for reaching certain percentages of your target amount. This helps you stay motivated and track your progress towards your ultimate goal.

Be Flexible and Adapt:

Financial goals should be flexible and adaptable to changing circumstances. Life is unpredictable, and your financial goals may need to change accordingly. Regularly review and adjust your goals as necessary. For instance, if you experience an unexpected job loss or medical emergency, you may need to adjust your investment strategy and timelines.

Seek Professional Advice:

If you are unsure about setting clear financial goals, consider seeking advice from a financial advisor or planner. They can help you assess your risk tolerance, define your goals, and create a personalized investment plan. Their expertise can provide valuable guidance, especially if you are new to investing in mutual funds.

Choose the Right Fund Type

Choosing the right type of mutual fund is a crucial step in your investment journey. Here are some factors to consider when selecting the right fund type:

• Risk Profile: Determine your risk tolerance and capacity. Are you comfortable with high-risk, high-return investments, or do you prefer lower-risk options? This will help you decide between equity funds (high risk) and debt instruments (low risk).
• Investment Goals: Different mutual funds cater to different financial objectives. For example, growth funds focus on capital appreciation, while income funds prioritise regular income. Choose a fund that aligns with your specific goals, whether it's wealth accumulation, retirement planning, or steady income.
• Fund Type: Familiarise yourself with the various types of mutual funds available. These include equity funds, debt funds, money market funds, hybrid funds, sectoral funds, tax-saving funds, aggressive growth funds, and more. Each type has its own characteristics and risk profile.
• Fund Performance: Evaluate the fund's historical performance over 3-5 years. Compare it against its benchmark and peer funds to assess consistency.
• Net Asset Value (NAV): NAV represents the unit price of a mutual fund. While a lower NAV may indicate cheaper investment opportunities, higher NAVs can suggest quality investments.
• Asset Management Company (AMC) Performance: Research the track record of the AMC in managing various schemes. Their past performance and expertise can give you an idea of their potential for generating returns.
• Expense Ratio: Consider the operational costs associated with the fund, typically ranging from 1-2%. Higher expense ratios can eat into your overall returns.
• Exit Load: Understand if there are any charges for early withdrawals. Some funds impose an exit load if you redeem your investment within a certain period, usually around 1% of the redemption value.
• Assets Under Management (AUM): A higher AUM indicates that more investors have faith in the fund, suggesting stability and potential for higher returns.
• Fund Manager Experience: Review the qualifications and track record of the fund manager. A skilled and experienced fund manager can make a significant difference in the fund's performance.
• Tax Implications: Be mindful of the tax consequences associated with the fund. Different types of funds have varying tax treatments, so ensure you understand how your investments will be taxed.
• Liquidity: Consider how easily you can buy or sell fund units. Look into lock-in periods, exit loads, and redemption limits. Choose a fund that offers flexibility in withdrawing your investment when needed.

Diversify Your Portfolio

Diversifying your portfolio is a crucial aspect of investing in mutual funds, especially for beginners. Here are some detailed instructions and guidelines on how to diversify your portfolio when investing in mutual funds in India:

• Understanding Diversification: Diversification is a risk management strategy that involves spreading your investments across various assets, industries, and investment styles. By diversifying your portfolio, you reduce the risk associated with putting all your eggs in one basket. When one investment underperforms, the others can potentially offset those losses and maintain the value of your portfolio.
• Asset Allocation: Allocate your investments across different asset classes, such as equity and debt instruments. Equity investments typically carry higher risk but offer higher potential returns. On the other hand, debt instruments are considered less risky and provide stable returns. A balanced portfolio should include a mix of both to suit your risk tolerance and financial goals.
• Mutual Fund Selection: Choose mutual funds that align with your asset allocation plan. Compare different mutual funds based on their investment objectives, past performance, fund manager expertise, and expense ratios. Select funds that match your risk profile and investment horizon.
• Diversification Across Mutual Funds: Invest in multiple mutual funds to further diversify your portfolio. Consider investing in different types of mutual funds, such as equity funds, debt funds, and hybrid funds. By diversifying across different fund categories, you reduce the concentration risk associated with a specific type of fund.
• Regular Monitoring and Rebalancing: Regularly monitor the performance of your mutual fund investments. Conduct periodic reviews to ensure your portfolio remains aligned with your investment goals and risk tolerance. If necessary, rebalance your portfolio by adjusting your asset allocation or switching between funds to maintain your desired level of diversification.
• Systematic Investment Plans (SIPs): Consider investing through SIPs, which allow you to invest a fixed amount at regular intervals. SIPs help with rupee cost averaging, enabling you to buy more units when the market is down and fewer units when the market is up. This approach smooths out market volatility and helps you build a diversified portfolio over time.
• Seek Professional Advice: Consult a registered financial advisor or a mutual fund expert if you need guidance. They can assist you in selecting the right mutual funds, diversifying your portfolio, and making informed investment decisions based on your risk tolerance and financial goals.

Understand the Basics of SIPs and Lump-Sum Investments

Systematic Investment Plans (SIPs) and lump-sum payments are the two primary investment strategies for investing in mutual funds. The main difference lies in the frequency and amount of the investment. SIPs are ideal for those with consistent income streams, as they involve investing smaller amounts of money on a regular basis, such as monthly or quarterly. Lump-sum investments, on the other hand, involve investing a large amount of money in a mutual fund in one go. This is suitable for those with a significant sum of money ready for investment and who are comfortable with market fluctuations.

SIPs

SIP stands for Systematic Investment Plan. It is a popular investment plan that allows investors to invest a fixed amount of money in a mutual fund at regular intervals, typically monthly. SIPs are highly flexible and can be started with a relatively small amount, making them accessible to a wide range of investors. They promote financial discipline and help investors stay committed to their investment goals. Additionally, SIPs allow investors to benefit from rupee cost averaging, where they buy more units when prices are low and fewer units when prices are high, reducing the impact of market volatility. SIPs are also well-suited for achieving specific financial goals, such as buying a house or funding education.

Lump-Sum Investments

Lump-sum investments involve making a one-time payment in full at the beginning of an investment period. This is suitable for short-term investment goals, and individuals with a high-risk tolerance who are comfortable with market volatility. Lump-sum investments can potentially yield higher returns if the market timing is favourable. They also offer the advantage of adapting to market conditions, allowing investors to take advantage of favourable market situations. Additionally, lump-sum investments are ideal for those with a substantial amount of money, such as from an inheritance or bonus, that they want to invest immediately.

Complete the KYC Process

Completing the Know Your Customer (KYC) process is a crucial step for anyone looking to invest in mutual funds in India. Here's a detailed guide on how to complete the KYC process:

Online KYC Process:

Visit the website of a KYC Registration Agency (KRA):

KRAs are agencies authorised to perform KYC verification, such as CAMS, Karvy, CVL, and NDML.

Create an account and complete the online form:

Provide all the necessary personal details, such as your name, registered mobile number, and PAN card details.

Upload self-attested documents:

Submit scanned copies of the required documents, including your address proof and identity proof. Ensure that the documents are self-attested.

Receive your KYC identification number:

Once your KYC process is complete and verified, you will receive a unique KYC identification number. You can share this number with your preferred investment platform to start investing in mutual funds.

Offline KYC Process:

Download the KYC application form:

Visit the website of a KRA, such as CDSL, and download the KYC application form.

Fill in the details and attach the required documents:

Complete the form with your personal information and attach attested photographs, ID proof, address proof, and a copy of your PAN card.

Submit the application and documents:

Submit the completed application and supporting documents to your chosen mutual fund house or intermediary at their office.

Additional Information:

• It is essential to ensure that all the information and documents you provide are accurate and up to date. Any discrepancies may lead to rejection or delays in the KYC process.
• The Permanent Account Number (PAN) card is mandatory for mutual fund KYC and serves as the primary identification proof.
• For address proof, you can provide self-attested documents such as an Aadhaar card, passport, voter ID, driving license, or bank account passbook.
• Starting from the 2024-25 fiscal year, investors will be required to update their KYC information with their Aadhaar to purchase new mutual fund units, as mandated by the Securities and Exchange Board of India (SEBI).
• The KYC process is typically valid for all financial entities, and you don't need to repeat it for each mutual fund house. However, any changes in your KYC information should be updated with the relevant intermediaries.
• The KYC process is crucial for preventing financial crimes, ensuring transparency, and complying with regulatory requirements.

By following these steps, you can complete the KYC process, which is an essential prerequisite for investing in mutual funds in India.

Frequently asked questions