How to Invest Mutual Funds - Strategies for Success (2024)

Investing your money wisely is a key step towards achieving your financial goals, and mutual funds offer a straightforward and effective way to do just that. Whether you are new to investing or looking to diversify your portfolio, understanding how to invest in mutual funds can set you on the path to financial success. In this article, we will walk you through the process of investing in mutual funds, covering key aspects from online investment to important considerations.

To learn more, read this article, where we will walk you through the process of investing in mutual funds. Also, you will learn how to make tax-saving investments, use Systematic Investment Plans (SIPs) effectively, and invest in different asset classes.

What are mutual funds?

Mutual funds pool money from multiple investors to invest in a variety of assets such as stocks, bonds, and more. Professional fund managershandle these investments, aiming to achieve the fund's goals while offering investors a convenient and diversified way to grow their wealth.

Explore more about what is mutual fund.

High-return mutual fund categories for smart investing

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How to invest in mutualfunds?

Anyone who is wondering how to start investing in mutual funds can follow these easy steps:

1. Invest in mutual funds through a mutual fund distributor:

Engage an AMFI registered distributor for financial advice and mutual fund transactions, with no direct fees charged to investors. Though regular plan costs are higher, distributors aid in risk assessment and selection. Note the inherentmarket risks and varied risk/return profiles among mutual fund products.

2. Direct Investment with the AMC:

Invest directly with an Asset Management Company (AMC) via office visits or online portals. For new investors, submitting KYC documents is necessary. Direct plans, with lower expense ratios, are suitable for experienced investors with a grasp of risk and market knowledge, offering higher returns compared to regular plans.

3. Invest through Registered Investment Advisors (RIA):

Opt for SEBI Registered Investment Advisors (RIA) to access direct plans without AMC commissions. RIAs may charge fees, emphasising a perceived lack of conflict of interest. Ensure thorough due diligence, considering the unbiased advice framework mandated by AMFI’s Code of Conduct for mutual fund distributors.

4. Utilise Registrars and Transfer Agents (RTAs):

RTAs handle mutual fund transactions for fund houses. Investors can transact in both direct and regular plans through RTAs, streamlining multiple investments across different AMCs serviced by the same RTA. Check the respective RTA's website to determine AMC coverage.

5. Online mutual fund investment:

1. AMC portals: Invest through online banking on mutual fund house websites, ensuring clarity between regular and direct plans.
2. RTA portals: Access online investment options on RTA websites using online banking, benefiting from a consolidated view of your mutual fund portfolio.
3. Distributor websites: Several distributors provide online investing through their websites, allowing a comprehensive overview of your mutual fund schemes.

6. Invest through stockbrokers:

Leverage stockbrokers offering online trading and demat services for mutual fund investment. As AMFI-registered distributors, they predominantly provide regular plans.

7. Bank-enabled mutual fund investment:

Explore wealth management services offered by banks for mutual fund investment. Being distributors, banks typically facilitate regular plans through their branches or online platforms.

8. Mutual fund investment via mobile apps:

Access mutual fund transactions through mobile apps provided by AMCs or RTAs. Perform various transactions, such as SIPs and redemptions, with ease. Download these apps from Google Play Store for Android phones, while some distributors also offer their own mobile apps for transactions.

How to invest in mutual funds based on asset classes?

Mutual funds are broadly categorised into three types based on distinct asset classes: equity, debt, and hybrid.

• Equity mutual funds: These funds invest in equity and equity-related securities with a primary objective of capital appreciation. Categories include large cap, midcap, small cap, large and midcap, multicap, and thematic or sector-based funds. Each type carries a unique risk-return profile, and your financial advisor can guide you in selecting the right fit.Read more about, What are equity funds.
• Debt mutual funds: Investing in debt and money market instruments, these funds focus on generating income. Categories are based on maturity or duration, such as overnight, liquid, ultra-short duration, low duration, money market, short duration, medium duration, medium to long duration, and long duration. Yourmutual fund advisor can assist in choosing the suitabledebt funds aligned with your risk tolerance and financial goals.
• Hybrid mutual funds: These funds diversify across multiple asset classes like equity, fixed income, gold, or real estate investment trusts. Aimed at capital appreciation and income,hybrid funds provide the advantage of asset allocation, spreading investment risk. Types include Aggressive Hybrid, Dynamic Asset Allocation or Balanced Advantage, Equity Savings, Multi Asset Allocation, Conservative Hybrid, and Arbitrage funds. Your financial advisor can help tailor a hybrid fund strategy that aligns with your risk appetite and investment objectives.

Investors can invest in their desired asset category of mutual funds on the Bajaj Finserv platform.

How to invest in mutual funds for tax saving purpose?

By investing in Equity Linked Savings Schemes(ELSS) mutual funds you can claim a deduction of up to Rs. 1,50,000 on your taxable income underSection 80C of the Income Tax Act. Once you invest, your ELSS units are locked in for 3 years, meaning you cannot withdraw them during this period.

How to invest inmutual funds throughSIP?

Know how you can invest in mutual funds in a disciplined manner through SIP:

1. Choose SIP: If you are opting for a Systematic Investment Plan (SIP), select the mutual fund and SIP option.
2. Set amount and frequency: Decide the amount you want to invest regularly (monthly, quarterly, etc.) through the SIP. This disciplined approach encourages regular saving.
3. Auto-debit: Enable auto-debit from your bank account to ensure seamless SIP investments without manual intervention.

To make informed decisions about your SIP investments, consider using the SIP calculator. This tool helps you estimate the potential growth of your investments over time, making it easier to plan your financial future effectively.

How to invest lumpsum amount in mutual funds?

Investing a lump sum in mutual funds involves putting a larger sum of money into a fund all at once, rather than spreading it out over time. Here's a simplified breakdown:

1. Choose an investment platform: Open an account with a reputable investment platform.
2. Define your goals & risk tolerance: Identify your investment goals andrisk tolerance.
3. Select a mutual fund:Research and choose a mutual fund that aligns with your goals and risk profile. Consider factors like asset allocation (mix of stocks, bonds) and past performance.
4. Invest: Deposit your chosen amount into the selected mutual fund through your investment platform.
5. Monitor and rebalance: Regularly review your investment performance and consider rebalancing your portfolio to maintain your desired asset allocation over time.

To optimise your lump sum investment strategy in mutual funds, try using the Lumpsum calculator. This tool helps you project the potential returns on your lump sum investment, allowing you to better plan and achieve your financial objectives.

Complete the KYC process before investing in mutual funds

Individuals must fill out a KYC form before investing in a mutual fund scheme, whether online or offline. This form requires them to provide documents that prove their identity (like a passport, Aadhaar card, or PAN card) and address (through documents like utility bills or rental agreements).

For those unaware, KYC (Know Your Customer) is a mandatory process under the Prevention of Money Laundering Act, 2002, and its associated rules. It must be completed before an individual can invest in mutual funds or open any financial account. This process establishes the identity and address of the investor using prescribed documents, such as a passport, Aadhaar card, or PAN card.

How much to invest in mutual funds?

When deciding how much to invest in mutual funds, several factors come into play. These commonly include:

• Your financial goals (what you hope to achieve with your investment)
• Your risk tolerance (how much risk you are comfortable taking)
• Your investment horizon (how long you plan to invest)
• Your current financial situation (how much money you have available to invest)

It must be noted that there isn't a legal minimum amount you have to invest in mutual funds. However, each mutual fund in India usually sets its own minimum investment requirement. Generally, this minimum amount can be anywhere from Rs. 500 to Rs. 5,000. Moreover, some types of mutual funds might require a higher minimum investment.

Cost of investment associated with mutual fund investment

Let us explore the various costs associated with investing in mutual funds:

• Management fee:The management fee is charged by the mutual fund to cover the costs of managing the fund. This fee is typically deducted from the fund's returns on a daily basis.
• Exit load:An exit load is a fee that is charged when youredeem your units from a mutual fund within a specified period of time. This fee is typically charged to discourage investors from short-term investing.
• Broker commission: This refers to the fee charged by a brokerage firm or financial intermediary for facilitating the buying and selling of securities, including mutual funds. This fee is accrued in the Total Expense Ratio of the funds.
• One-time charge/Transaction charge: There might be a one-time fee when you invest in mutual funds. This fee is usually small and may not apply to investments below Rs. 10,000. The exact amount can vary depending on the mutual fund company (AMC) you choose.
• Selling costs: When you sell your mutual fund units, you may incur some charges.
  • Securities Transaction Tax (STT): This tax depends on the type of mutual fund scheme you invested in:
    • Close-ended schemes & ETFs: 0.001% of the selling value.
    • Open-ended equity funds: 0.25% of the selling value.
    • Debt funds: No STT is charged.
  • Stamp duty: This is a government tax applied when you buy or sell mutual fund units, regardless of whether you hold them electronically or physically. The stamp duty amount depends on the situation:
    • Buying units, new SIP/STP installments, switching within a fund, and reinvesting dividends: 0.005%.
    • Transferring units between Demat accounts or off-market transfers: 0.015%.

Important points to keep in mind before investing in mutual funds

Listed below are some important points to remember before investing in mutual funds:

• Your investment goals:What are your investment goals? Are you saving for retirement, a child's education, or a down payment on a house?
• Your risk tolerance:How much risk are you comfortable taking with your investments?
• Your time horizon:How long do you have until you need to access your money?
• Your investment amount:How much money do you have to invest?
• The fees:Be sure to factor in the fees associated with mutual fund investing when making your decision.
• The liquidity:Mutual funds are generally liquid investments, but it is important to check the liquidity of the specific fund you are interested in.
• The tax implications:Be sure to understand the tax implications of mutual fund investing.

Read more about: What are the charges involved in a SIP.

Conclusion

Investing in mutual funds can be a smart way to grow your wealth, but it requires thoughtful planning and informed decisions. By following these steps and considering the factors mentioned, you can embark on your mutual fund investment journey with confidence. Remember, each investor's financial journey is unique, so take your time, research thoroughly, and seek professional advice if needed. Your commitment to understanding and managing your investments can lead you towards achieving your financial dreams.

Essential tools for mutual fund investors