How to Invest in Mutual Funds
Investing in mutual funds is as simple as clicking a button. At the same time, it is not as simple too. What makes mutual funds simple and complicated at once? There are many ways in which you will find it easy, and a number of ways you may also find it difficult. This article will explore how you can make it as simple as possible.
How Does Mutual Funds Work?
First of all, how does mutual funds work? Mutual fund is a facility where people can pool money to invest collectively. Based on your investment, you will be allocated a number of units in your portfolio. Your returns depend on the nature and number of units in your portfolio. There are different types of mutual funds that cater to the appetites of different investors. According to SEBI categorization, the major types of mutual funds are Equity funds, Debt funds, Hybrid funds, Solution Oriented funds and others. In all these categories, we have various kinds of mutual funds each with a direct and a regular scheme for investment.
How to Invest in Mutual Funds?
Mutual fund investment can be done through a number of ways. It can be done either offline or online.
Usually people invest in mutual funds in two ways: direct and regular. Regular investment is done through an intermediary who could be a financial adviser, broker or an agent. Until 2013, this was the only way to invest. In 2013, SEBI issued a mandate making it compulsory for AMCs to introduce direct investment choice for investors. In direct plan, an investor can invest in a mutual fund without third party involvement. This removes the unnecessary expense spend as commissions from the picture. Not having to pay commissions reduces the expense ratio considerably. Hence, for an investor direct investment has many advantages.
Steps to Investing in Mutual Funds
- Have a Goal
Having a goal is very important for an investor. From your investment style to risk, a lot of other important decisions are dependent on your goals. Having a clear goal will keep you focused and avoid distractions along the way.
- Have a Plan
Having a goal is not enough. Entering the investment arena without a clear action plan can be like being in a maze. Having a plan based on your goal helps you always be several steps ahead than the most investors. In a highly unpredictable market, having a plan could mean being in control and keeping calm in the face of adversities and setbacks. Have a guideline on how your investment style will be, and act accordingly.
- Risk Appetite
Investment is a unique journey for everyone. One person’s methods may not yield the same results for another. Different investors have different levels of risk tolerance. Simply put, risk tolerance is one’s ability to endure setbacks without giving in to pressure. It is a factor one has to take into consideration before making investments.
There are hundreds of mutual funds available these days. How do we choose the best mutual fund that is suitable for us? The truth is, investing should not be a blind game where we randomly choose a fund and dive in. A wise investor researches thoroughly into the fund, not leaving out its past performance, experience of the fund manager, expense ratio and so on before you choose a mutual fund.
- Choose an Investment Style.
Once again, there are two ways to invest in a mutual fund in terms of investment style. One can either invest a lump sum amount, or small amounts at regular intervals. The latter is called a systematic investment plan or SIP. Learn how to invest in SIP. How to start SIP investment is simple enough to learn. If you have the required documents and a bank account, you are all set to start a SIP.
- Keep Up to Date
Keep abreast of the changes in the market. See how your mutual fund is doing, as well as track performances of different sectors, companies and economies in general. Being informed about the latest trends and developments will give you an edge.