Complete Guide to Mutual Funds

[JackHughes]

Mutual funds are a well-diversified, low-cost, and tax-efficient way to grow your savings. They are an ideal investment vehicle for those who do not have the experience to invest directly in stocks. You simply invest in a fund and the fund manager will do the work of selecting the stocks they think will produce good returns.

If you are one of them, here is a manual that will help you enter the world of mutual funds with ease. It summarizes the key steps in your mutual fund investment journey and explains everything you need to know to get started.

1. Getting ready:

There are some unique prerequisites for investing in a mutual fund. You need to have a bank account and must comply with KYC- (know your customer). KYC is the process of verifying the identity of an investor. It is free and only requires your passport size photograph, PAN and Aadhaar card. You can check your KYC status here. If you haven't signed up for KYC yet, you can apply in two ways: online and offline.

Offline KYC can be done by completing a form that is available on the Registrar and Transfer Agent (CAMS / Karvy) and all Mutual Fund Houses (AMC) websites. You can also complete your KYC in five minutes by completing an online form on the AMC or RTA website. You need to provide your registered mobile phone number and Aadhaar number for verification via OTP. Your in-person verification (IPV) is done through a video call, where you must show your original identity and proof of address. Once verified, you are ready to invest in best mutual funds.

2. Choice of funds:

Mutual funds are meant to make investing easier for you. But ironically, the task of choosing the right funds can become daunting given that you are faced with over 2,500 fund schemes to choose from. These are the decision points you will be faced with and this is how you can make the right decisions with ease.

3. Purchase of funds:

Now that we have passed the fund selection stage, we are ready to go ahead and buy them. You can buy funds directly from a fund house or through a broker.

To invest directly, you will need to submit completed forms, checks, etc. at the investor service centers of mutual fund houses or registrars, which have their branch networks in many cities. Or more conveniently, you also have the option of investing online through mutual fund house websites or various mutual funds service online platforms that make it easy to buy and sell mutual funds. Payments can be made online using net banking or UPI to complete the transaction.

In case you prefer to invest through a broker, there are a wide variety of them available, including banks, individual financial advisers, distribution companies, online portals, and brokerages.

At this stage, you will need to think about how much to invest and how often. You generally have two options here: Lump Sum Investing or Systematic Investment Plans (SIPs). Lump sum investing simply means that you invest all the money you want to invest in one go. SIP, on the other hand, involves investing a fixed amount with a fixed frequency (usually monthly). For example, if you have Rs 1 lakh to invest, you can invest the entire amount in a lump sum or you can create a monthly SIP with each payment of Rs 10,000 over a period of 10 months. Which is better? Well, for debt funds, you can invest a lump sum, but for equity funds or balanced funds, we strongly recommend that you create a SIP spread for a certain number of months.

4. Track your investments:

You must track the performance of your investments. But don't overdo it. Given the ubiquity of modern technology, you will receive constant updates on the ups and downs of the market. Don't get carried away by this. Reviewing your investments from time to time is all you need to do. Use My Investments on Value Research to analyze every detail of your portfolio.

5. How and when to sell:

Generally speaking, there are two reasons why you should consider selling your fund: 1) It has become underperforming; or 2) You need the money to reach the financial goals you were investing for in the first place. Let's look at both of them one by one.

a. Underperforming - If the fund's performance has consistently fallen compared to the peer group and benchmark, you should carefully consider whether or not it should be part of your portfolio. However, don't let a single month of poor performance change your mind. You must have a longer-term view on this. A quick and convenient way is to keep an eye on the fund's rating. In case your rating drops to one or two and you stay there for a few months, you may consider selling it and looking for a better option.

b. Meeting your financial goal: In the case of equity funds, you should withdraw them systematically or manage MF online. Therefore, as your planned goal approaches, exit your equity funds for a period of two to three years and move your money into debt funds. This gradual withdrawal is important to avoid being negatively affected by sharp drops in equity markets in the last minute. However, in the case of debt funds, it is okay to withdraw your money all at once.

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