A Beginners Guide To Mutual Funds in India - Updated

What are Mutual Funds?

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. These funds are managed by professional fund managers who allocate pooled resources across various assets to achieve specific financial objectives. Essentially, mutual funds allow individual investors to benefit from professional management and diversified exposure with relatively small investments.

Why Should You Invest in Mutual Funds?

1. Diversification: Mutual funds spread your investments across various assets, reducing risk by balancing losses from one asset with gains from another.
2. Professional Management: Your investments are handled by experienced fund managers who have deep knowledge of the markets.
3. Affordability: You can start investing with as little as ₹500 through SIPs (Systematic Investment Plans).
4. Liquidity: Most mutual funds offer easy redemption, allowing you to withdraw your investment whenever needed.
5. Tax Benefits: Some mutual funds, like Equity-Linked Savings Schemes (ELSS), offer tax deductions under Section 80C.

Types of Mutual Funds

1. Equity Mutual Funds: These invest primarily in stocks and are ideal for long-term capital appreciation.
2. Debt Mutual Funds: Focus on fixed-income securities like bonds and government securities, offering stable returns with lower risk.
3. Hybrid Mutual Funds: A blend of equity and debt investments, these funds balance risk and reward.
4. Index Funds: These track a specific market index like the Nifty 50, offering lower management fees.
5. ELSS Funds: These equity-based funds provide tax deductions under Section 80C and are suitable for long-term goals.
6. Sector Funds: Invest in specific industries like technology, healthcare, or banking.

Important Points to Keep in Mind Before Investing

1. Risk Tolerance: Understand your comfort with risk before choosing a fund.
2. Investment Horizon: Determine how long you plan to stay invested; this affects your choice between equity and debt funds.
3. Financial Goals: Align your investment with your short-term or long-term objectives.
4. Expense Ratio: Lower expense ratios ensure more of your money is invested.
5. Past Performance: While not a guarantee, reviewing past performance helps gauge the consistency of returns.

How to Invest in Mutual Funds Online?

1. Register on a Mutual Fund Platform: Sign up on platforms like Groww, Zerodha Coin, or directly with the mutual fund house.
2. Complete KYC: Submit PAN, Aadhaar, and address proof for verification.
3. Select Your Fund: Choose based on your goals, risk appetite, and investment horizon.
4. Start Investing: You can start investing either through SIP or lump sum.

Different Ways of Investing

1. Direct Plans: Invest directly through the fund house, which saves on commission fees.
2. Regular Plans: Invest via intermediaries like brokers or financial advisors who charge a commission.
3. SIP (Systematic Investment Plan): Invest a fixed amount periodically, ideal for disciplined investing.
4. Lump Sum: Invest a large amount at once, suitable for those with surplus funds.

Costs of Investing in Mutual Funds

1. Expense Ratio: A fee charged for managing your fund, typically ranging from 0.5% to 2%.
2. Exit Load: A fee applicable if you redeem your investment within a specified period.
3. Transaction Fees: Some platforms or intermediaries may charge fees for transactions.

High-Return Mutual Funds

High-return mutual funds are generally equity-focused, investing in high-growth sectors. Examples include:

• Large-Cap Funds: Invest in established companies with stable returns.
• Mid-Cap Funds: Focus on medium-sized companies with growth potential.
• Small-Cap Funds: Invest in smaller companies, offering higher returns but with increased risk.

How to Invest in Mutual Funds?

1. Define Your Goals: Set clear objectives like retirement planning, buying a home, or saving for your child’s education.
2. Choose the Right Fund: Based on your risk tolerance and goals, select from equity, debt, or hybrid funds.
3. Decide on SIP or Lump Sum: SIPs are ideal for regular income earners, while lump sum works better if you have a large amount ready.
4. Complete the KYC Process: Ensure your KYC is updated before starting your investment.
5. Invest via a Platform: Use apps like Groww, Zerodha Coin, or invest directly through the fund house.

How to Invest in Mutual Funds for Tax-Saving Purposes?

1. Choose ELSS Funds: ELSS (Equity-Linked Savings Scheme) funds offer tax deductions under Section 80C, up to ₹1.5 lakh annually.
2. Stay Invested for 3 Years: ELSS funds have a mandatory lock-in period of three years, the shortest among all tax-saving instruments.
3. Opt for SIP or Lump Sum: You can choose to invest monthly via SIPs or as a lump sum at the beginning of the financial year.

How to Invest in Mutual Funds Through SIP?

1. Select a Fund Suitable for SIP: Look for funds that align with your goals, like equity or hybrid funds.
2. Decide the SIP Amount: Determine how much you can consistently invest each month.
3. Choose the SIP Frequency: SIPs can be set up monthly, quarterly, or even weekly.
4. Automate Your Investment: Set up an auto-debit mandate from your bank account to ensure timely investments.

How Much to Invest in Mutual Funds?

1. Based on Goals: Your investment amount should align with your financial objectives, whether short-term or long-term.
2. Monthly Income and Expenses: Calculate how much you can invest regularly without compromising your lifestyle.
3. Diversification: Spread your investments across different types of funds for balanced risk and reward.

Investing in mutual funds is a flexible and efficient way to achieve your financial goals. Whether you're a seasoned investor or a beginner, these insights will help you navigate your journey confidently.

FAQ

Can I invest only ₹500 in a mutual fund?

• Yes, many mutual funds allow you to start with a very small amount, sometimes as low as ₹500, especially if you are investing through an SIP. This makes it accessible for a broad range of investors.

Are mutual funds safe?

• Mutual funds vary in risk depending on their investment strategy. Equity funds, for example, have higher potential returns but come with higher risk. Debt funds are generally safer but offer lower returns. It’s important to choose a fund that matches your risk tolerance and investment goals.

Can I withdraw SIP anytime?

• Yes, you can withdraw from a mutual fund investment, including SIPs, but there may be implications such as exit loads (fees) or tax consequences depending on how long you’ve held the investment and the type of mutual fund. Some funds might have lock-in periods or other restrictions, so it's a good idea to check the specific terms and conditions of your mutual fund.

Which is better: mutual fund or FD?

• Mutual Funds and Fixed Deposits (FDs) serve different purposes and have different risk profiles. Mutual funds offer potentially higher returns but come with market risk. They can invest in stocks, bonds, or other assets. Fixed Deposits, on the other hand, provide guaranteed returns with minimal risk but generally offer lower returns compared to mutual funds. The choice depends on your risk tolerance, investment goals, and time horizon.

Is SIP tax-free?

• A Systematic Investment Plan (SIP) itself is not tax-free. It is a method to invest in mutual funds regularly. The tax treatment depends on the type of mutual fund you invest in. For example, Equity Mutual Funds held for more than one year are subject to long-term capital gains tax, but the first ₹1 lakh of gains in a financial year is tax-free. For Debt Mutual Funds, the tax treatment is different and includes both short-term and long-term capital gains taxes.

What is the 15 15 15 rule?

• The "15-15-15 rule" typically refers to the tax benefits related to the National Pension System (NPS) in India. It states that contributions up to ₹1.5 lakh to NPS qualify for tax deductions under Section 80CCD(1) and additional deductions under Section 80CCD(1B), and the corpus accumulated is tax-free at maturity if it is used to purchase an annuity.

Get a Personal Loan that fits your needs. Apply for loans from Rs 1000 to Rs 15 Lakhs with competitive rates. 

Check Your Eligibility Now 

Find the Perfect Credit Card for your spending habits. Explore top credit cards and maximize your rewards. 

See Your Matches 

Author - Abhishek Sonawane

Abhishek Sonawane, an MBA graduate from the prestigious Indian Institute of Management Visakhapatnam (IIMV), brings over ten years of experience in the finance domain. His extensive background includes various roles in financial management and strategy, providing him with a comprehensive understanding of the financial landscape. Abhishek’s expertise and dedication to financial education make him an authoritative voice in personal finance, helping readers make informed financial decisions.