You Don’t Know Anything about Mutual Funds? Don’t Worry – Here’s your Basic Guide!


Mutual Funds raise funds from multiple investors and invest across different securities in a low cost and tax efficient way of making your savings grow.

It’s the best way of investing when taking the wheel in our hands isn’t an option. Even with the appropriate knowledge, investing directly in the share market can be pretty time consuming.  However, in case of Mutual funds, you simply invest in a fund, and the fund manager does the rest.

Although the concept of mutual funds was specifically designed for small investors and kept simple, it failed at getting adopted the way it should have been as a majority of the Indian investors are either unaware of it or just find it too complicated to understand. Here is a summary of the key steps that you need to know to efficiently step into the world of mutual funds.

Like every other money-making activity in our economy, trading in Mutual Funds also requires some prerequisites. Let’s take a deeper look at these and know what we need to have before we can legally start investing. Following are the things that you require.

1) Bank Account

2) KYC (Know you customer) compliance. (Identity verification for the investor)

3) Self attested copies of address and identity proof

4) Recent passport sized photos

5) Last but not the least, a PAN card, without which investing above 50,000 rupees in each fund house every year is where your investing limit will be.

 Constantly striving to improve the overall investing environment, the facility of e-KYC is also made available for small investors which eliminates the need to submit any physical forms.

After you are done with all the mandatory compliances, it’s now time to choose from the various Mutual Funds. These, however created to simplify and aid the investing process for common man, can offer a perplexing headache due to the excessive number of schemes available to choose from. Here are a few questions that you need to ask yourself to ensure the best choice

Debt or Equity?

 This basically means deciding to invest between equity shares and securities that offer a fixed income (Debt mutual funds). Given the low risk facto, the latter gives lower but steadier returns often chosen to meet short term financial objectives where saving takes precedence over how much you get back.

Equity, on the other hand, involves investing in shares that have the potential to earn much higher returns but have also have a high-risk factor involved over a shorter period. The chances of facing any losses from equity investments take a significant dip over longer investment periods. Hence these are what you might want to look into in order to build meaningful wealth over the long-term.

Balanced funds are a recommended investing option for first timers as they offer about 65% investment in equity and the rest nicely parked in debt mutual funds allowing you to fly high with a safety cushion ready to catch you.

 After having chosen the basic kind of investment, choosing specific mutual funds which mirror the same is the next most important step. Most people tend to go wrong here by relying on friendly advice or going in blindly with whichever option is trending.  A short list of well researched mutual funds can go a long way. That are online portals available that rate various funds based on long-term risk-adjusted returns and therefore, reward funds that have a proven track record of performance.

In recent years, there have been many mutual funds which have been growing such as Birla Sun Life Mutual Fund, DSP BlackRock and IDFC Mutual Fund.

How Much Diversification is Enough?

Make sure that that you don’t end up investing in a large number of funds as you may just recreate your current holding by doing so. A single fund alone diversifies your portfolio with 40 to 50 stocks.

Direct Plan or Regular Plan?

A direct plan is one in which you have invested yourself without going through a broker or an agent.  You may want to instead go through a distributor initially and invest in regular plans. Later, once you’ve become more knowledgeable and confident, you can think of switching to direct plans.

Buying Funds?

Now that you have a grasp of the basics, it is time to go ahead and buy the fund. You can do this either on your own or through an intermediary.

For investing directly, you’ll have to submit filled forms, cheques, etc. at investor service centers of the mutual fund houses or registrars, who have their branch networks across many cities. Or more conveniently, you also have the option of investing online at the websites of the mutual fund houses.

In case you prefer to invest through an intermediary, there is a wide variety of them available, including banks, individual financial advisors, distribution companies, online portals, and brokerages.

Monitoring your Investments?

Its basic human nature to a keep on checking on your portfolio. But, overdoing it is however not advisable. The actively dominating role of technology being the way it is, immediate ups and downs can constantly haunt you on the phone screen. Just remember to check in once in a while!

How and When to Sell?

There are broadly two reasons why you should consider selling your fund. Either it has become a poor performer; or you need the money to meet the financial goal(s) for which you were investing, in the first place.

Don’t take the decision in haste and figure out various options for the same. Every year ensure to re-balance your portfolio according to the accomplishment of your future financial goals.

Well, mutual funds may seem a very complicated affair, but it really isn’t once you grasp the basics. It has slowly and steadily become one of the most sought-after investments.

Don’t wait to cash-in on this opportunity and save up for your dreams and ambitions today.


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