How to Invest in Mutual Funds for Beginners?

Beginners can start investing in mutual funds either online or offline. Read more in the blog.
How to Invest in Mutual Funds for Beginners?
3 mins read
17-April-2024

Diversification is the essence of reducing the overall risk in your investment portfolio. One way to do this is to individually select and invest in different asset classes. An easier way, however, is to invest in mutual funds. Not sure what they are and how they work? In that case, this mutual fund investment guide is just what you need to understand investing in mutual funds for beginners.

Let us begin by defining what mutual funds are and proceed to explore the different types of mutual fund schemes.

What are mutual funds and how do they work?

Mutual funds are a type of pooled investment option where the capital collected from different investors is used to purchase a basket of different assets. The assets in a mutual fund’s portfolio depend on its investment objective. The total portfolio is then divided into shares or units, and each unit is assigned a Net Asset Value (NAV) based on the net assets held by the fund.

Investors are allotted units in proportion to the amount of capital they have invested in the fund. As the values of the assets fluctuate, so does the NAV per unit in the mutual fund. Consequently, it results in capital appreciation or depreciation, depending on how the asset values move. This forms the fundamentals of investing in mutual funds for beginners.

Next in our mutual fund investment guide, we look at the different types of mutual fund schemes available in India.

Different types of mutual funds

To offer better clarity on how to invest in a mutual fund for beginners, it is important to first understand the different types of funds available. Mutual funds can be classified as follows, based on different criteria.

  • Based on organisational structure:
    Mutual funds can be open-ended mutual funds (which can be purchased or redeemed at any time) or close-ended mutual funds (which have specific redemption timeframes).
  • Based on investment objective:
    Mutual funds can have different objectives like growth, liquidity or income generation.
  • Based on the underlying assets:
    Mutual funds can be classified as equity funds, debt funds, hybrid funds or multi-asset funds based on the assets in their portfolio. Within each such category, there are subcategories based on the type of equity or debt instruments chosen.
  • Based on the management style:Mutual funds may be actively managed or passively managed (as is the case with index funds).
  • Based on other factors:
    Thematic mutual funds invest in assets that fit a specific theme, while sectoral funds focus on specific market sectors. There are also overseas funds (which invest in international assets) and funds of funds (which invest in other mutual funds).

Factors to consider before investing in mutual funds for beginners

Another important aspect of investing in mutual funds for beginners is to know what factors to consider before you begin. So, next in this mutual fund investment guide, we check out the important aspects to factor in before investing in MFs.

  • Your investment goal: Your mutual fund investments should align with your overall financial goals. This will help you achieve them within the planned target timelines.
  • Your risk profile: Mutual funds carry different levels of risk. It is important to choose funds whose risk levels align with your risk tolerance and risk capacity.
  • Your investment horizon: Mutual funds also invest in assets with different timelines. Your choice of funds must ideally align with the timelines for achieving your goals.
  • The expense ratio: Mutual funds may also carry entry and/or exit loads and come with other charges like management fees. It is imperative to factor these in before you choose a fund.
  • The fund manager’s expertise: Another important area to consider before investing in mutual funds for beginners is the expertise and experience of the fund manager.

The mode of investment: You also need to decide whether to invest a lump sum in your preferred mutual funds or start a Systematic Investment Plan (SIP).

How to start investing in mutual funds as a beginner?

The process of investing in mutual funds for beginners is fairly easy. You can choose any of the following options to get started:

  • Invest in mutual funds via a mutual fund distributor
  • Choose to invest directly via an Asset Management Company (AMC)
  • Invest in mutual funds via stock brokers
  • Invest in the funds of your choice through Registrars and Transfer Agents (RTAs)

Conclusion

This concludes our mutual fund investment guide for beginners. If you are new to the mutual funds market, the concepts and details covered above can help you become familiar with this market segment. You can then assess your goals, risk tolerance and investment horizon to find the right schemes for your portfolio.

The Bajaj Finserv Mutual Funds Platform can help you with this. You can find over 1,000 mutual fund options to choose from. All you need to do is compare mutual funds to find those that align with your requirements. You can then easily make a lump sum investment or start a SIP in your preferred fund.

Calculate your expected investment returns with the help of our investment calculators

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Frequently asked questions

Which mutual fund is a suitable investment for beginners?
Index funds or balanced funds are generally considered suitable for beginners because they offer diversified exposure to the markets. This makes investing in mutual funds for beginners easier to manage.
How can I go about investing in mutual funds as a beginner?
If you are a beginner to investing in mutual funds, start by defining your goals, assessing your risk tolerance and defining your investment horizon. You can then find mutual funds that align with these aspects and begin investing.
Can I invest Rs. 1,000 in a mutual fund?
Yes, you can invest Rs. 1,000 in a mutual fund by starting a Systematic Investment Plan (SIP) in the scheme of your choice. Many funds allow SIP investments starting at Rs. 500 per month.
Is KYC mandatory for investing in mutual funds?
Yes, the Know Your Customer (KYC) process is mandatory for investing in mutual funds for beginners. It involves verifying your identity and address, so mutual fund houses know who their customers are and can prevent fraudulent investments.
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