Just a few days back, I had a chat with a first-time mutual fund investor. He asked some basic questions like how to invest in a mutual fund. Later, he asked me about the famous mutual fund scheme in the market, that is consistently paying out dividends every month for the last 20 years. He asked whether dividends and fund safety were guaranteed in that scheme.
Some questions were shocking because dividends are declared only if a company makes any profit. And only the company board can decide to declare a dividend or not. They may not provide dividends in certain circumstances. So, it is completely wrong to say that a monthly dividend is guaranteed.
And all the mutual fund products are subject to market risk, so in the short run, you may even witness capital loss.
Before answering his questions, I asked his source of information. And as usual, I found another case of mis-selling. I would not take the name who did that, as it is not important who provided that information in the context of this post.
The more important issue is, that mis-selling of financial products is a very serious problem in India. There are two main reasons for this. One is greed, and another reason is a lack of basic awareness about mutual funds.
I have even seen some people investing in mutual funds just because their friends invested in them. Well, one of the best solutions to this problem is spreading awareness about mutual funds. And I often do that. I have educated as many new mutual fund investors as possible.
But, I can not cover everyone, as we have a big population who do not know about it. This is the reason I decided to write a post to spread awareness to the maximum number of people. If you are a first-time mutual fund investor or looking for help to choose the right mutual fund, this post is for you.
I am very confident that you will have a basic idea of how a mutual fund works after you complete the post. I will also guide you on how to invest in mutual funds and how to choose the most suitable fund.
So, Before you start investing, It is better to start with some basics of mutual funds,
What is a mutual fund?
You must have a clear idea of what a mutual fund is, and how it makes money before you know how to invest in them. We will try to understand mutual funds with simple examples without changing the actual meaning. Because I know definitions are very boring, and you do not need them.
So, In simple language, the mutual fund is a pool of money created by several small investors like us. And that money is invested in the stock market, debt market, or gold by seasoned fund managers.
let’s make it easier, imagine you are a stock market investor and investing 1 lakh rupees in different stocks. But, In mutual funds, there are so many investors like you, who have invested 1 lakh rupees.
Just imagine, how big that investment amount would be if 10 thousand people invested 1 lakh rupees each!
That is 100 crores!
So, what are the benefits of such a huge amount?
When you directly invest 1 lakh rupees in a company, you are a minority shareholder. You will have nothing saying in the company, even if the company doesn’t perform well.
But, mutual funds can put performance pressure on a company on behalf of all the small unitholders, as their cumulative investment amount is in crores.
Mutual funds are managed by seasoned funds managers. They are experts in investment strategies in the stock market, debt market, or gold. So, if you are new to the stock market, it is best in your interest to take advantage of their services by investing in mutual funds.
Mutual funds charge you fees for all these benefits. Fees charged are approximately 1% to 2% per annum of your amount invested.
Types of mutual funds in India
The type of mutual funds is a very vast topic and deserves separate posts for every type of mutual fund. But in summary, all the types of mutual funds are decided by various asset classes where mutual funds are investing money.
Apart from these funds, there are other types of mutual funds like index funds, balanced funds, and money market funds. I will write a separate post on various types of mutual funds. Now, you know what is a mutual fund, next important question is
Why invest in mutual fund
I have already explained a few reasons why you should invest in mutual funds.
The first reason is, that mutual funds provide the expertise of experienced fund managers, who handle funds for you.
The second reason is, that the fund size is big in mutual funds, so it provides the benefit of economy of scale.
And the last reason is the power of compounding that the equity market provides. If you check the history of the equity market, it generates a significant amount of wealth in the long term.
But for doing that, you must have a clear idea about what is equity mutual fund. As you are now aware of mutual funds and why you should invest in them, we will see how you can invest in mutual funds.
You can either do it offline by visiting the office or you can do it conveniently over your smartphone. Here, we will focus more on the latter.
How to invest in mutual funds online?
Online platforms are more convenient options to invest in mutual funds. We will go through it, but the more important is how to choose a suitable mutual fund and complete the KYC process.
If you are a first-time investor, It is highly recommended to have a clear idea about the KYC process before you start investing. You can go through my post on how to do KYC in a mutual fund if you do not know about it.
It is a one-time process for investing in mutual funds and the stock market. You can complete it offline by visiting mutual fund offices or online over your smartphone. visit any mutual fund company website or CAMS or KARVY and follow the instructions to complete KYC.
The online process works the same as offline, Follow instructions in the online form to complete transactions, and you are good to go.
The next step is very important. It is to choose a suitable mutual fund product.
How to pick mutual funds
Picking mutual fund products differs from person to person. Because all people can not have the same financial goals and risk appetite. Your financial goals can be different from your friend’s, like having a car, buying a home, and planning for marriage, and retirement.
The same applies to your risk appetite, your friend or relative may be comfortable with more or less risk than you.
So, take some time, and think about it, Is it wise to invest in the same product, just because your friend had invested in it? It is not.
First, identify your financial goals and risk profile, then choose a mutual fund product. YOu may surely have confusion that, which mutual fund should you invest in. There are almost 50 mutual fund houses in India and thousands of mutual fund schemes.
So, it is complicated, to choose what the best for you. My suggestion is, to pick good rating products from authentic websites like Morning star, but you should not only rely on the rating. Look for other factors like fund size, the experience of a fund manager, and past performance.
I know that past performance may not sustain in the future but it will help you know how well the fund is managed by the fund managers. Also, check the top 10 companies where the fund is invested.
On the same page, you would come across words like the regular and direct fund.
What is a regular and direct mutual fund?
Regular mutual fund
In a regular plan, you invest your money in a mutual fund through an agent, like a financial advisor or bank. They help you choose a mutual fund. If you think you do not have any idea about a mutual fund, take their advice and invest through them.
Because they provide you service, they earn a commission from your investment, which makes your investment cost higher.
Direct mutual fund
If you invest in a mutual fund through an AMC office, you will get a direct plan. You can even do that on your smartphone. Visit and official website of a mutual fund company, or visit any online third-party platforms that provide direct options.
If you like to research and find a suitable mutual fund, then go for a direct plan. Because you do not get any service from an advisor, you can save the commission that you have to pay in a regular plan.
Is it the right time to invest in a mutual fund
Your money is invested in the stock market when you invest in the equity mutual fund. And you know that the stock market is highly volatile, it goes up and down as per sentiments. This is why it creates a general perception about timing like there is a right or wrong time to invest in mutual funds.
If you are investing in mutual funds with any long-term horizons like 3 years, 5 years, or 10 years, then remember you are not investing for any short-term profit or loss in the stock market. So, it is not wise to worry about daily price movement. You should maintain the financial discipline and stay invested till your pre-decided time horizon.
If you check overall stock market returns, in the short term like in a year, you may find so many ups and downs. But when you check long-term returns like 3 or 5 years, you may find that your returns are way higher than your fixed deposits.
If you are uncomfortable with capital loss, then start investing with SIP to take advantage of averaging.
The moral of the whole story is, that once you determine your financial goal and time horizon, any time is the right time to invest. The best time for investing in the stock market was 15 years back and the next best time is today!
So, that’s everything about the basics that you should know before you start capital building journey. I said it’s a journey because it is going to be a long journey and believe me you will enjoy it.
I have tried solving almost all the queries faced by beginners. If you still have more queries, you can let me know in the comments. Here are some frequently asked questions for beginners.
Frequently Asked Questions
Which mutual fund is best to invest in India ?
If you are new to mutual funds, I would recommend starting with some big brand names of mutual funds that are performing well over the years. You can search different schemes of SBI mutual fund, Axis mutual fund, Nippon mutual fund, HDFC mutual fund.
Each fund house has some good quality high performing schemes in specific categories. You can choose any product after studying its past performance, fund manager and fund size. If you are already an investor then explore schemes of small but quality fund houses like Mirae AMC, Parag parekh or Sundaram mutual fund.
Are mutual funds safe ?
If you are asking about regulatory safety, then your money is in completely safe hands. Mutual funds in India are regulated by SEBI and SEBI is well reputed in safeguarding interests of small investors. If your safety concern is regarding market risk, then I would say first decide your finance goal and time horizon and select a mutual fund accordingly. Invest in mutual funds only if your investment horizon is minimum 3 years or longer.
Can I invest 100 rupees in mutual fund ?
Yes, you can start investing in a mutual fund with the smallest amount of 100 rupees through SIP route. But it differs from company to company. Some fund houses like Nippon provide a facility to start with SIP of minimum 100 rupees while others like in HDFC your minimum SIP amount should be 500. You can always find the minimum amount to invest in SIP or lumpsum by referring to the factsheet of any particular mutual fund company.