Mutual funds (MF) are a popular investment option for retail investors in India. These investment vehicles mobilize funds from different investors and allocate them to stocks, bonds, and other securities to achieve a predetermined investment objective.
There are many options for mutual funds available with different investment objectives and potential risks. You can easily invest in mutual funds online through the websites of fund houses. You can also invest through platforms like Kuvera to compare different mutual fund schemes before allocating your funds.
Before discussing how to invest in mutual funds, let’s understand how mutual funds work.
How Do Mutual Funds in India Work?
Asset Management Companies (AMCs) collect funds from individual and institutional investors, having a common objective for MF investments. After that, fund managers invest the money strategically to generate the maximum returns while considering the scheme’s intent.
Fund managers are investment professionals with the experience and track record of managing investors’ funds. They charge a certain fee in return for their services. Any income or gains from such investments is distributed proportionally to all the investors.
There are multiple types of mutual funds, depending on their investments. For example, equity mutual funds invest in the stock market and are ideal for individuals with a high-risk appetite. In contrast, debt mutual funds carry low risk and are a suitable option for conservative investors. When investing in mutual funds, you might consider your financial goals, risk appetite, and NRI Mutual funds investment horizon.
When you invest in a mutual fund, the AMC allocates units of the scheme to you based on the Net Asset Value (NAV). NAV is the combined market value of all assets that the fund holds on a particular day. It is calculated by subtracting the liabilities and expenses from the total assets and dividing the difference by the total number of outstanding units.
For example, let’s say that you have invested Rs. 10,000 in a mutual fund with a NAV of Rs. 40. That means you will get 250 units of that mutual fund scheme.
Mutual funds are ideal for retail investors who lack the funds to diversify their investments. Furthermore, they are suitable for those who do not know about financial markets. In India, there are many mutual funds to invest in for financial needs.
Types of Mutual Funds in India
Mutual funds can be broadly classified based on the following factors:
Based on asset classes
- Equity funds: Equity mutual funds invest primarily in equity shares of companies. These funds have the potential to generate higher returns than other categories but carry higher risks as well. The different types of equity funds include large cap funds, mid cap funds, small cap funds, multi cap funds, ELSS funds, focussed funds, etc.
- Debt funds: Debt mutual funds primarily invest their financial assets in fixed-income instruments like government securities, treasury bills, corporate bonds, debentures, etc. These debt securities offer stability and regular interest income with little risk. Debt funds come in various categories like liquid funds, overnight funds, gilt funds, etc.
- Hybrid funds: Hybrid mutual funds invest in both equities and debt instruments to provide the right balance of risk and returns for investors. Some of the different types of hybrid mutual funds are conservative funds, aggressive funds, arbitrage funds and balanced advantage funds.
- Solution-oriented funds: These mutual fund investment schemes are meant for specific financial goals; they come with a lock-in period of at least five years. Retirement funds help to generate wealth over the long-term for building a retirement corpus, while children’s funds let you accumulate funds for your child’s higher education/wedding.
- Other funds: These include index funds and fund of funds (FoFs).
Based on fund structure
- Open-ended schemes: These mutual funds are always open for subscription. There is no limit on how many units you can purchase or when you can invest. That said, ELSS is the only open-ended mutual fund that has a lock-in period.
- Close-ended schemes: Units of these mutual fund schemes can be bought during the new fund offer (NFO) period. You can redeem the units only upon maturity or sell/redeem them on the stock exchanges.
- Interval schemes: These mutual funds have features of both closed-ended schemes and open-ended schemes. One may trade the units on the stock exchanges. Alternatively, they can be sold or insta redeemed during set time intervals.
Based on portfolio management
- Active funds: In the case of active funds, fund managers ‘actively’ take all investment decisions. They adopt different strategies with the aim of generating better returns than the benchmark index.
- Passive funds: When it comes to passive funds, the fund managers have a ‘passive’ role as they only have to replicate an index or benchmark. As a result, fund houses levy a lower expense ratio for passive funds in comparison to active funds.
Based on investment objectives
- Growth funds: These mutual funds aim to provide capital appreciation by investing primarily in well-performing stocks. Investors need to be able to handle short-term volatility and have a medium-long term investment horizon.
- Income funds: The aim of these mutual funds is to provide steady income to investors. Income funds invest in low-risk securities like government securities, debentures and corporate bonds.
- Liquid/overnight/money market funds: Liquid funds, overnight funds and money market funds are highly liquid investment options that can offer stability to an investor’s portfolio.
Why Would I Want to Invest in Mutual Funds?
The following are some of the reasons why you may want to invest in mutual funds:
Makes investment easier
Many investors do not have the skills, inclination, or time to conduct research and find the best investment option. So, it might be hard for them to participate in the capital markets. Fund managers of mutual fund schemes do all the hard work of choosing the right instruments, letting you benefit from uptrends in the market.
Offers portfolio diversification
One of the biggest benefits of mutual funds is that it mitigates your portfolio risk. As mutual funds invest in a wide range of asset classes and sectors, it reduces the risks of losses from one sector or company. You can invest in different types of mutual fund investment schemes to reduce the risk and maximise portfolio returns.
Benefit from the power of compounding
Compounding involves earning more returns from existing returns. If you stay invested for a long time, the returns tend to grow considerably over the years. This lets you accumulate sufficient funds for your financial goals, which may include financing the expenses of your child’s wedding, expensive vacations, etc.
Get access to the expertise of fund managers
Apart from having considerable knowledge of the financial markets, you must have thorough research to identify companies that have the potential to generate substantial returns. By investing in mutual funds, you get the expertise and experience of professional fund managers who have a proven track record of generating significant risk-adjusted returns.
Instils financial discipline
Mutual funds encourage you to remain invested over long periods of time. Many investors find it difficult to grow their wealth as they do not keep investing in the market regularly. SIP investments help to take emotions out of the equation preventing investors from panicking in bear markets.
Different Ways to Invest in Mutual Funds
There are several ways to invest in mutual funds in India. Some of these are described as follows:
By visiting the AMC’s branch
You can invest in mutual funds directly by visiting the AMC’s branch. If you are a new investor, you have to complete the KYC verification first. To purchase units of a mutual fund scheme, submit a duly filled application form at Investor Service Centre (ISC), the fund house’s branch, or to their Registrar.
Through the AMC’s website
You can invest in mutual funds online using AMC’s website. The process involves opening a new account, filling out the FATCA form, providing bank details and uploading relevant documents. You can also complete the KYC process and the In-Person Verification (IPV) online if you are a first-time investor.
Through an intermediary
In addition to the above methods, you can choose to invest in regular plans through a mutual fund distributor. Brokers/distributors offer you assistance in choosing the best MF to invest in. However, note that the expense ratio of regular plans is higher than that of direct plans.
Through registered investment advisors
You can also choose to invest in mutual funds with the help of SEBI registered investment advisors. RIAs do not have a conflict of interest as they do not get any commission from AMCs. Instead, they charge a fee for their services, and you can invest in direct plans using their advice.
Through your Demat account
If you have an existing Demat account, you can use it to invest in mutual funds. To invest, log in to your Demat account and look for the mutual fund investment option. Next, choose the top mutual funds to invest in and transfer the required amount.
How to Invest in Mutual Funds through Kuvera?
You can invest in direct mutual funds through Kuvera and avoid paying commissions. It is the best platform to invest in mutual funds as it is 100% free and helps you find the right investment for your life goals.
To invest in mutual funds via Kuvera, follow the given steps:
Step 1: Sign up at www.kuvera.in.
Step 2: Complete the KYC requirements and link your bank account.
Step 3: Click on MF in the Explore section to choose mutual funds for investment.
Things to Consider When Investing in Mutual Funds
Before you invest in mutual funds online, make sure to consider the following factors:
- Risk appetite: Whenever you invest in a mutual fund scheme, you should evaluate its potential risks. For example, if you have a high risk-bearing capacity and can bear market volatility, you can purchase equity funds. In contrast, a conservative investor can choose debt funds.
- Fund’s past performance: Before you invest in a mutual fund online, consider looking at its past performance for the last 3-5 years. You should compare its performance against the benchmark of the fund category. It is important to note that a fund’s past performance is not an indicator of its future returns.
- Expense ratio: All mutual fund houses charge a fee called expense ratio to cover their managerial and operational expenses. As per SEBI regulations, fund houses can charge a maximum expense ratio of 2.25% of a fund’s total assets. The higher the expense ratio, the more it will cut into your returns.
- Experience of the fund manager: All AMCs are required to declare all details about their fund managers, including their qualifications and experience. As fund managers are responsible for investing your funds, you should check their track record.
- Investment modes: You can invest in mutual funds through two modes — lump sum and Systematic Investment Plan (SIPs). Lump sum investments let you take advantage of market corrections but carry high risk. With an online SIP investment, you can invest a small sum over a long time and benefit from rupee cost averaging and the power of compounding.
Whether you are looking for high returns or low risks, mutual funds offer the right solutions for all sorts of investment needs. If you are investing in mutual funds, the above sections will tell you everything you need to know about them. Before allocating your savings, make sure if a fund is suitable for your risk appetite, financial goals, and investment horizon.
Frequently Asked Questions
What is the meaning of the AUM of a mutual fund?
Assets under Management (AUM) tell you how much total assets are managed by a mutual fund. A mutual fund investment with a higher AUM indicates a large fund corpus and higher popularity of the scheme.
Should NAV be the main factor in choosing a mutual fund?
No, NAV should not be the main factor when investing in a mutual fund. Since the stock market is quite dynamic in nature, the NAV of mutual funds also goes up and down every day.
A mutual fund can have a high NAV if it invests in quality stocks or expensive stocks without high value. Alternatively, a low NAV could mean more growth opportunities or low-quality assets. One should consider other aspects like investment goals, risk appetite and expense ratio when investing in a mutual fund scheme.
Can you save taxes by investing in mutual funds?
Yes, you can save taxes by investing in a particular category of mutual fund — ELSS. Equity Linked Savings Schemes (ELSS) are equity mutual funds that allow tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act for investments during a financial year. ELSS funds are popular as they have the lowest lock-in period of Section 80C investments and offer high potential returns.
What are the taxation rules for mutual funds?
If you hold units of equity-oriented funds for less than 12 months, short-term capital gains (STCG) tax is applicable at the rate of 15%. Long-term capital gains (LTCG) from equity funds are taxed at 10%.
For debt funds, STCG are taxed as per your applicable income tax slab for a holding period of 36 months or less. Long term capital gains from debt funds are taxed at 20% with the benefit of indexation.
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