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Begin your first step towards Mutual funds

Complete Guide for beginners on
how to invest in Mutual Funds.

Karvy
Financial
Academy

I want to learn


  • Equity
  • Mutual Funds
  • Commodities

How to invest in Mutual Funds

What is Mutual?

It is a trust that collects money from a number of investors who have a common investment objective. Then, it invests the money in number of securities like equities, bonds, money market instruments etc. Each investor owns units, as per the amount invested which represent a portion of the holdings of the fund. The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s NAV.

Mutual fund for Beginners

Before getting into further details about it, let’s understand few common terminologies related to Mutual Funds in India.

NAV: Net Asset value

NAV is like cost of each unit of mutual fund. NAV shows the price at which the mutual fund units can be purchased and sold at the time of redemption. The fluctuation in NAV is dependent on underlying assets of the portfolio. If the value of securities goes up, it’s reflected in NAV and same thing happens at the time when value of securities goes down.

Fund Manager:

Fund manager is the domain expert. He is the profession who designs the complete strategy of the mutual fund portfolio and takes buy and sell decision. He is the key part of mutual fund management because the performance of the fund is completely dependent on the fund manager. A fund usually has 1 to 2 fund managers depending upon asset allocation.

Units:

Being a mutual fund investor, we invest in portfolio of the scheme and don’t become owner of various securities available in the portfolio. So keep a count of money invested, it is allotted to the investor in the form of number of units. Each will have a NAV (price) which will quantify.

Expenses Ratio:

Expenses ratio is a kind of fee which is charged by the AMC for managing the portfolio. It includes fee of distributors, management fee and other charges. So while you purchase or sell the fund, NAV which you get is adjusted with expense ratio.

AMC: Asset Management Company

It is the company who manages all the money invested in the fund. It’s the brand name of the fund.All the documentation and funds are managed with them and their other internal teams

Exit Load:

Exit load is charge at the time of redemption of mutual fund schemes in India, if you withdraw/redeem your investment before 1 year in case of equity fund and 3 years in case of debt funds. Usually it’s 1% and is applicable on the total amount which includes you invested money as well as returns generated.

Types of Mutual funds

They are of 2 types:

  • Open-end mutual fund shares are bought and sold on demand at their net asset value, or NAV, which is based on the value of the fund’s underlying securities and is generally calculated at the close of every trading day. Investors buy shares directly from a fund
  • Closed-end funds have a fixed number of shares and are traded among investors on an exchange. Like stocks, their share prices are determined according to supply and demand, and they often trade at a wide discount or premium to their net asset value.

    Dos and don’ts while investing in Mutual funds:

    Mutual funds are subject to market risks, please read all scheme related documents before investing. You must have heard these lines many times in life so let’s understand now what kind of impact mutual funds have on our money.

    Dos:

    1. While investing in Mutual funds, you should very clearly understand details like objective of the fund and the asset class in which the scheme falls. It is very important to align you investments as per your requirement.
    2. You should always seek professional help to select funds if you are new to investment.
    3. Keep a track of your funds even after investing. These are lot of scenarios in the market that can affect your fund performance.
    4. It’s important that you calculate how much amount you will need for each goal which will help you to figure out how much investment is needed from you side and then you can save for it accordingly.
    5. It’s always important to use professional SIP and Lump sum calculators to derive the investable amount. Don’t consider some vague figure.
    6. Always start investing as early as possible so you have enough time to let your money grow and you will not be burdened by bigger investment at a later stage.
    7. Invest in products with multiple benefits like tax saving combined with good returns.

    Donts:

    1. Don’t always pick the funds in which your friends or colleagues are investing. There are higher chances that their goals and risk profile can be completely different than yours.
    2. Don’t follow only the funds which have generated higher returns in past. Always look to the consistence of the returns.
    3. Always diversify your investments, don’t just fix yourself on one category.
    4. Try not to mix investment and insurance.
    5. Don’t hurry while investing; take your time you understand the product you are going to invest in.

How to invest in Mutual funds

It’s really important that you have all the information related to mutual fund before you actually invest. These are the few steps which you can to understand how to invest in mutual funds.

Step 1: The first thing you need to check is you need to have an account for investment.

Once can invest in mutual funds via demat account or investment account

Demat account is your dematerialize account in which you can hold mutual fund units in electronic demat account. You can also hold shares and other exchange traded funds, bonds and shares. There is annual maintenance fee linked to demat account.

Investment account on the other hand doesn’t have any fee, you can only invest in mutual funds via this account and can’t hold other demat products. So once you decided to open an account.

Take a look at the features that make your online investments hassle-free

Easy Customer On-boarding:

All you need to do is complete your KYC process and register your email address to generate your username and password, before you start investing online in funds of your choice.

Financial Transactions:

You can now complete financial transactions like investing in a scheme of your choice, switching your investments from one scheme to another or redeeming your investments from a particular scheme, online; in just a few clicks.

Compare Funds:

Keep a track on the performance of funds and to see the change in their NAVs over a period of time, so that you can take informed decisions about your investments in different categories of funds.

Online Chat:

For any kind of assistance, you can chat with our expert online, who will answer queries and help you out to ensure that your online investment process is hassle-free and convenient.

Create Watch-lists and Alert Notifications:

If you want to proactively manage your investments based on a sound market understanding, the online portal lets you create watch-lists to keep a close track of your chosen funds and also set alert notifications so that the information you need and want is always at hand.

Step 2 Select the fund you want to invest in

Here also you have 2 options, one is you can choose the fund by doing your own research or else you can always take professional help.

To select fund on your own follow these mini steps

Past Performance and Age of the fund:

Past performance speaks tremendous about one’s ability and likelihood for success. Definitely past performance can’t guarantee future returns , but it gives you indication of how the fund manager was able to generate returns during ups and downs of market cycle, You can get a clear picture about the returns generate were because of bull market run or the strategies used by the fund manager.

However it is only possible with the funds which has track record of more than 5 years where a full market cycle get covered, new funds can only be judged based on the objective of the fund as well as fund allocation.

Consistency:

This is very important for the people who have an investment time horizon of medium or long term, a fund can’t be judged based on its 1 year or 6 months returns.

For example, a fund which is consistently giving 12% returns is better than a fund occasionally giving 20% returns. While selecting a fund, higher return should be the criteria but consistency of return should be equally important.

Market Cap allocation:

: ELSS funds are free to choose their allocation in equities; however you should also give certain weightage while selecting a fund basis your risk profile. A fund, having higher exposure towards large cap will take care of a moderate client’s risk profile, similarly, one should see what kind of allocation the fund has given to mid and small cap to assess the risk return trade off.

XIRR of the fund:

XIRR helps in calculating the internal rate of return for scheduled cash flows. Many of us don’t have lump sum amount to invest hence choose to invest periodically. By calculating the XIRR we can further filter best funds.

Next step is to select whether to invest in lumpsum of SIP.

Depending on your future goal and market scenario you can select which way to invest

Benefits of investing in SIP

An SIP is a specific amount, invested for a continuous period at regular intervals. It is similar to a regular saving scheme like a recurring deposit. It allows the investor to buy units as per a pre decided frequency; the investor decides the amount and also the scheme. SIPs bring discipline to your investments.

Rupee Cost Averaging:

Timing the market is a difficult task. Rupee cost averaging is an automatic market-timing mechanism that eliminates the need to time one`s investments. Here, one need not worry about where share prices or interest are headed as investment of a regular sum is done at regular intervals; with fewer units being bought in a declining market and more units in a rising market. Although SIP does not guarantee profit, it can go a long way in minimizing the effects of investing in volatile markets.

Convenience:

Three simple paperless steps to invest in an SIP:

  • Register for an SIP online
  • Fill the required details
  • Ensure availability of funds

Disciplined Investing

It’s the key to investing success. Regular investment makes you disciplined in your savings and also leads to wealth accumulation. Systematic investing is a time-tested discipline that makes it easy to invest automatically. Investing regularly in small amounts can often lead to better results than investing in a lump sum.

Now you have completed all the steps to start your investment. It’s important to keep a continuous track of your investment and reviewing them time to time so you are on the right track to complete your goals and save yourself from market risk.


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