How to Invest in Mutual Funds? A Guide to Investing in Mutual Funds

Is it your first time investing in mutual funds? Does it seem too complex? Well, it's not!

A mutual fund is a pool of investments by different investors who share a common objective. This pool is managed by a fund manager who then invests these collective funds in different securities and shares in the market.

Unconventional in nature, mutual funds come with market risks but also with huge scope to increase wealth with low investments considering they are well-diversified.

Here is a beginner's guide to mutual funds, to help you understand the basics of how to invest in mutual funds.

People have different financial goals in mind when they make investments. If you're planning on investing with mutual funds, identify your financial goals and assess your risk-taking ability. There are fund options to cater to various goals which can vary from education to marriage to settling abroad.

Additionally, it helps if you divide your goals into short-term and long-term. The traditional methods of savings like fixed deposits, recurring deposits & debt mutual funds work better for a short-term financial goal. Ideally, if you plan on investing in mutual funds, you should give it a minimum of 3 years to get good returns.

1. Understand the Risk Involved

   A thumb-rule of investing in mutual funds is that you should never underestimate the risk and be aware of all the risk factors involved. Unless you come with an appetite for high risk, go with safer options like debt mutual funds or equity mutual funds. The market, when volatile can end up affecting your investments and give you less or zero returns as well.

2. You Don't need Large Investments

   Since the principle of mutual funds is based on money-pooling and investing, you don't need to contribute large sums of investment. You can start with a sum as low as Rs.500 per month. If you're a first-time investor, you can start with Rs. 500-1000 per month and then increase your investments based on your portfolio and returns.

3. Have Your KYC Documents Updated

   There are a few prerequisites that need to be met for you to invest in a mutual fund. You must be KYC compliant and if you aren't, you can register for it with a Transfer agent (CAMS/KARVY) or with the Registrar. For a KYC process, the regular identification documents are required - identity proof, address proof, recent passport-sized photographs etc. Additionally, you also require a PAN card and your Aadhar card for registration.

4. Objective should be a Long-term benefit

   When it comes to mutual funds, consistency is key. You should look at investing in schemes that remain consistent through the volatile phases in the market and can deliver decent or good returns on your investments.

5. Portfolio Diversification is a Smart Choice

   People look for liquidity and good returns from their investments. Depending on the precedence, they can look at diversifying their portfolio by investing in fixed deposits, gold, debt, equity and other money-making instruments. When you invest in a mutual fund, your fund manager's key task is to diversify your portfolio across different asset classes to help with better returns and minimize risk. The secret to long-term wealth creation is a balanced portfolio.

6. Also Look for Tax benefits

   Yes, you read that right! You can reap tax benefits by investing in some forms of mutual funds. The dividend declared is completely tax-free for the investor. Mutual funds like Equity Linked Savings Schemes (ELSS) help you save on income tax under Section 80C of the Income Tax Act by allowing you a tax deduction up to Rs. 1.5 lakh.