How to invest in Mutual Funds?

Research is essential for finding a mutual fund that works for you. You must ensure the fund you choose suits your investment horizon and risk appetite.
 

According to the Ministry of Finance, mutual funds is one of India's most popular investment vehicles, having over 1.85 crore subscribers by 2021. It has slowly overtaken traditional asset classes by helping investors regularly earn inflation-beating returns. It offers a wide and varied range of schemes suited for different investor- and goal-types. You can invest in the scheme that suits your risk appetite and achieve your desired return on investment (ROI).

Having said that, you should not invest in mutual funds simply because everyone else is. Before investing in the asset class, you must learn how it works.

How do mutual funds work?
 

Mutual funds are run by asset management companies (AMCs). Every company runs multiple mutual fund schemes based on specific ideas or themes. Dedicated fund managers track the performance of each mutual fund scheme, making changes to it if needed.

You can buy units of a mutual fund scheme, with each unit containing a part of the securities held by the scheme. Your returns will be proportional to the performance of the securities held by the scheme.

Tips for investing in mutual funds
 

Investing in mutual funds can be challenging unless you follow some guidelines. Here are a few rules that can help you get the most out of mutual funds:

1. Choose a fund that suits your investment horizon.
2. Research and analyse the performance of the fund.
3. Ensure you invest in a mutual fund scheme offered by a reputed AMC.
4. Know the fund's policies, including the lock-in period, expense ratio, etc.

Choose your investment method. You can invest in mutual funds via the SIP (Systematic Investment Plan) route or a lump-sum investment.

Types of mutual funds

After analysing your risk appetite and investment goals, you can invest in different types of mutual funds.

Equity mutual funds:
 

Equity mutual funds invest primarily in equities. Equities can offer growth and inflation-beating returns, although they carry risk. Hence, you must invest in equity mutual funds only if you are ready for the volatility that comes with investing in the capital markets.

Debt mutual funds:
 

Debt mutual funds invest in debt instruments like corporate bonds. They are comparatively less risky than equity mutual funds, although they cannot offer the same returns as the latter. 

Balanced advantage funds:
 

Balanced funds invest in both equities and debt and inherit advantages of both. They can keep your capital safe and, at the same time, make use of market opportunities to build wealth.

Equity-linked savings scheme (ELSS):
 

ELSS is a tax-saving mutual fund scheme. It primarily invests in equities and has a lock-in period of three years. The scheme comes under section 80C of the Income Tax Act, earning deductibles to the tune of ₹1.5 lakh.

Short-term mutual funds:
 

Most mutual funds are best suited for long-term investment. But if you have a shorter vision, you can invest in short-term mutual funds. These funds invest in bonds with a shorter maturity date.

Mutual funds have become popular because they can conveniently help you achieve your investment goals. You can pick a mutual fund that suits your risk appetite and slowly invest in it through regular SIPs. Some mutual funds can also help you save tax, helping you save more.

IDFC FIRST Bank's mobile banking app can quickly help you invest in mutual funds. You can complete the KYC process online, set your SIP date, and begin your mutual fund investment journey.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.