Mutual Fund Investments: How To Start Your Journey?

Mutual Fund Investments: How To Start Your Journey?

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Feb 7, 2024 13:50 IST

Mutual fund investments are important if you want to build yourself financially in the long term. A mutual fund is a financial vehicle that is composed of money collected from investors for investing in bonds, stocks and other assets. These are operated by professional money managers who allocate fund assets to produce gains for fund investors. This article will help your journey of mutual fund investments.

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Table of Contents

What are Mutual Funds?

Mutual funds are both investment and a company. When an investor buys company stocks, he is buying a percentage of ownership in the company. A mutual fund investor is also buying partial ownership of that mutual fund company. 

If a mutual fund is a virtual company, its CEO is known as the fund manager or investment adviser. The board of directors hires this fund manager who has to take care of the interests of mutual fund shareholders. Most fund managers also own this fund. The fund manager also employs analysts to perform market research and pick investments. 

Fund accountants calculate the fund’s NAV, the daily portfolio value to determine whether share prices will go up or down. Compliance officers and attorneys for government regulations make up the team of mutual funds.

Unlike stocks, mutual funds do not provide their holders with voting rights. The price of a mutual fund is referred to as net asset value (NAV) per share or NAVPS. It is derived by dividing the total security value by the total amount of outstanding shares. These shares are held by insiders, shareholders, company officers and institutional investors. 

These can be purchased and redeemed at the current fund NAV. Unlike stock prices, it does not fluctuate during market hours and is settled at the end of the trading day. Whenever the NAVPS is settled, the price of the mutual fund is updated. 

For any mutual fund, money is pooled in from the public to buy stocks, bonds and securities. The mutual fund is worth the performance of securities that it decides to buy. If you think you are buying a mutual fund, you are actually buying the performance of the portfolio. It represents investments in different stocks rather than a single holding.

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What Should You Consider While Starting Investing in Mutual Funds?

1. Figure Out Your Goals: Think about what you're saving for. Is it something far off in the future like retirement or college? If so, mutual funds that invest in stocks are a good pick because they can grow a lot over time. If your goal is closer, like buying a car or a house soon, you might want to choose mutual funds that invest in bonds instead.

2. Choose the Right Mutual Fund

Understand for how long do you want to invest in mutual funds.

  • Long-term goals: If you've got a lot of time, like decades, go for mutual funds that are mostly about stocks. These are called "growth funds" because they help your money grow.
  • Mid-term goals: If you're a bit nervous about putting all your money in stocks or your goal is 5 to 10 years away, look at "balanced mutual funds." These invest in both stocks and bonds, so there's less up and down.
  • Near-term goals: If your goal is just a few years away, you want to be really safe. Maybe put a little in stocks and more in bonds. This way, you get some growth but not too much risk.

3. Do Your Homework on Mutual Funds

  • Look at past performance: It's not a promise, but it gives you an idea of how well the fund does.
  • Check out the fees: Look for funds with low fees because high fees can eat into your money over time.
  • Management style: Some funds have a manager picking stocks (active) and others follow a set list like the S&P 500 (passive). Passive ones usually have lower fees.

4. Open an Investment Account

  • If you have a job: You might have retirement accounts such as 401(k) to invests in mutual funds.
  • If not: You can open an account like an IRA for retirement or a regular brokerage account for other goals.

5. Buy Mutual Fund Shares

  • Start with enough money: Some mutual funds have a minimum amount you need to start.
  • Buying shares: Unlike stocks, you can buy mutual funds in any dollar amount, which is great for investing exactly how much you want.

6. Keep Investing Regularly

  • Set up automatic investments: This way, you keep adding to your mutual funds over time without having to think about it.
  • Check in yearly: Make sure your investments are still doing what you want them to do.

7. Think About Selling: Eventually, you'll sell your mutual fund shares to use the money. If you have to pay a fee to sell (like with some funds), remember that. And if you've made money, you might owe taxes, so plan for that.

How to Start Mutual Funds Investments?

You can also start mutual funds investment by submitting an application form. Submit this along with a cheque or bank draft at the Investor Service Centres (ISC) or to the Registrar & Transfer Agents of that mutual funds. You can choose a Mutual Fund Distributor who can be either an individual or a non-individual entity such as banks, brokering and an online distribution channel provider. 

Do note that as per SEBI Mutual Fund Regulations distributors must fulfil the following two requirements before engaging in the distribution of mutual fund products:

  1. They must obtain the applicable certification of National Institute of Securities Management (NISM).
  2. Should be registered with the Association of Mutual Funds in India (AMFI ) and should have the AMFI Registration Number (ARN).

You can invest online through mutual fund websites of your choice. You can also choose a financial intermediary without involving any distributor to route your mutual fund investments.

Investors can also buy mutual fund units via NSE – MFSS and BSE – StAR MF. You must complete the one-time online registration with NSE or BSE.

Explore NISM certifications

Methods for Short-Term Mutual Funds Investments

Before starting mutual fund investments, you must assess your risk tolerance and investment objective. If you have short-term financial goals, try investing in the following:

1. High-yield Savings Accounts

  • Good for: People who don't like risks and need their money soon.
  • Risks: Almost none because the bank keeps your money safe.
  • Benefits: You get more money back than you would with a regular savings account.
  • Getting your money: Easy, you can take money out up to six times a month without extra fees.

2. Cash Management Accounts

  • Good for: Having your money ready to use and still earning some interest.
  • Risks: Very low, your money is in safe investments.
  • Benefits: You can do bank stuff like writing checks and moving money easily.
  • Getting your money: Super easy, get it anytime.

3. Money Market Accounts

  • Good for: When you need your money soon without hassle.
  • Risks: Low, especially if the bank protects your money.
  • Benefits: Pays more interest than a regular savings account.
  • Getting your money: Easy, but there are some limits on how often you can take money out.

4. Short-term Corporate Bond Funds

  • Good for: Putting your money in a bunch of company loans for a short time.
  • Risks: You could lose money, but it's pretty safe.
  • Benefits: You get paid interest regularly.
  • Getting your money: Easy, you can sell anytime the market is open.

5. Short-term U.S. Government Bond Funds

  • Good for: Super safe investment for people who don't like risks.
  • Risks: Really low, it's like lending money to the government.
  • Benefits: You get a steady amount of money back.
  • Getting your money: Very easy, these are easy to sell.

6. Money Market Mutual Funds

  • Good for: Keeping your cash somewhere it can grow a bit.
  • Risks: Not as safe as a bank account but still pretty safe.
  • Benefits: You earn some money on your cash.
  • Getting your money: Fairly easy, and you might be able to write checks.

7. No-penalty Certificates of Deposit (CDs)

  • Good for: Earning interest without worrying about fees for taking your money out early.
  • Risks: Low, your money is protected.
  • Benefits: You get interest and your original money back when the CD ends.
  • Getting your money: More flexible than regular CDs because you can take your money out without a penalty.

8. Treasurys

  • Good for: The safest way to save your money for a short time.
  • Risks: Very low, it's backed by the government.
  • Benefits: Safe but doesn't pay a lot of money.
  • Getting your money: Easy, you can sell them anytime the market is open.

Explore investment certifications 

Methods for Investing in Mutual Funds for Long-Term 

For long-term purposes, make such investments can make up for your retirement planning process. You can invest in the following:

KYC Before Investing in Mutual Funds

Before investing in any mutual fund, you must complete the KYC process. You can do this by filling up the Know Your Customer form, mandatory under the Prevention of Money Laundering Act, 2002. It is a customer Identification Process while opening an account with any financial entity. 

The process helps in establishing the identity of an investor and his address. For this, the investor must submit relevant supporting documents such as a photo ID in passport, Aadhaar and PAN card. You also need to submit address proof.

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Returns on Mutual Fund Investments

Any investor can earn returns from mutual funds in three major ways:

  1. Investors can earn income from stock dividends and interest on bonds within the fund portfolio. A fund pays out its entire income over a year to fund owners as distribution. Funds offer investors the choice to receive checks for distributions or reinvest these earnings to get more shares.
  2. If these funds sell securities that have increased prices, the fund has a capital gain. Most funds pass on these gains in distribution to their investors.
  3. If your fund holdings have increased in price but are not sold by a fund manager, the shares of the fund increase in price. You can sell your mutual fund shares in lieu of a profit in the market.

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Benefits of Mutual Funds Investments

The following are the most significant benefits of investing in mutual funds:

1. Expert Guidance

A professional fund manager handles your investments. The research team helps in tracking the market on a real-time basis. According to that research, fund managers can make changes to your mutual fund portfolio so that you gain maximum returns on your mutual fund investments. This is a great method for investors who lack time and skills to track markets and suitable investments.

2. Hassle-Free

Mutual fund investments are hassle-free since it is a paperless process that you can complete at your own comfort from your home. After the investment, you can keep a track of your holdings remotely through your laptop or smartphone.

3. Small Investments 

You can start investing at as low as Rs. 500 every month through SIP where you can invest such small amounts regularly. You can increase your SIP investments as your income also increases. This will benefit you because of the power of compounding.

4. Diversification

Portfolio diversification helps in minimising your risk and loss. Through diversification, results can even out by cushioning total investments. Mutual funds provide adequate diversification to your investments.

5. Tax Benefits

You can avail yourself of tax benefits under Section 80C of the Income Tax Act. According to this section, you get tax deductions on investments in certain financial instruments, including mutual funds. As of the current law, you can claim up to 1.5 lakh as a tax benefit annually in the Equity Linked Saving Scheme (ELSS) which offers the shortest lock-in period. 

FAQs

How can you invest in mutual funds without a Demat account?

In this case, you can invest in mutual funds through offline and online modes. Through offline mode:

  1. In case you do not have a Demat account, you can invest in mutual funds directly with a mutual fund house by visiting the AMC branch.
  2. You need to fill out an application form.
  3. Submit the self-attested address and identity proof for KYC compliance.
  4. Submit the initial amount cheque. You will be allotted a PIN and folio number.
  5. Contact your mutual fund distributor and then invest in a mutual fund regular plan.
  6. Through online mode: You can invest in a direct plan online through an AMC.
  7. You will need to fill up a registration form and complete your eKYC.
  8. For this, you will need to submit PAN and Aadhaar details.

You can also invest in mutual funds through an online portal.

How can you invest in mutual funds without a Demat account?

In this case, you can invest in mutual funds offline and online.

Through offline mode:

  • If you do not have a Demat account, you can invest in mutual funds directly with a fund house by visiting the AMC branch.
  • You need to fill out an application form. Submit the self-attested address and identity proof for KYC compliance.
  • Submit the initial amount cheque. You will be allotted a PIN and folio number.
  • Contact your mutual fund distributor and then invest in a regular fund plan.

Through online mode:

You can invest in a direct plan online through an AMC. You will need to fill up a registration form and complete your eKYC. For this, you will need to submit PAN and Aadhaar details. You can also invest in mutual funds through an online portal.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio