If you are a first-time investor, you must be looking for a guide on how to invest in a mutual fund for beginners. For this reason, we have curated a comprehensive mutual fund investment guide for novice investors. You can invest in mutual funds in several ways. You can do so directly by visiting the website of the relevant mutual fund. This route does not involve an intermediary like an AMFI-registered mutual funds distributor or broker.
You can also invest in MFs by submitting a duly completed application with a bank draft or cheque to the approved Investor Service Centers (ISC) of mutual funds or to the Registrar & Transfer Agents of the respective mutual funds. In this article, we explain everything from how to choose mutual funds and how to start investing to tips and strategies beginners can deploy to optimise their MF investments.
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 guide for beginner mutual fund investors in India, we explore the various types of mutual fund schemes that are available. As a beginner, selecting the appropriate type of mutual fund before making any investment is essential.
Beginners need to understand 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.
Consider your investment goals
Specific and time-bound financial objectives offer perspective, purpose, and direction to your investments. They help clarify how much you need to save and invest to achieve the goal within the given timeframe. Your investment horizon varies depending on your goal's nature. For instance, short-term goals like planning a vacation or buying a car can be achieved within 2-3 years, while long-term ones like retirement planning take a decade or more. As an investor, you can have multiple investment goals at different times. You simply need to align your mutual fund investments with these goals.
Evaluate the different types of mutual funds
As a first-time investor, you need to carefully evaluate the different types of mutual fund categories available. The risk exposure, return potential, and other nitty-gritty vary depending on the type of mutual fund in question. For instance, equity funds have a higher risk exposure but offer better return potential than low-risk debt funds. To choose the right mutual fund, you must first assess your risk tolerance level. Generally, balanced funds are considered prudent for beginners looking to invest in mutual funds. But before you start investing, remember to carefully read about various mutual fund categories in detail.
Assess mutual fund schemes carefully
Each fund type has several mutual fund schemes under it. To choose the right one, you need to consider factors like expense ratio, exit loads, asset portfolio, fund performance, and the fund manager’s experience. Carefully evaluating these factors can be crucial to make informed financial decisions. You can shortlist and compare mutual fund schemes to understand these parameters better.
Consider diversifying your investment
Opt to diversify your portfolio by investing in different types of mutual funds. Investing in a variety of funds will minimise your risk exposure as well as optimise return potential. When one fund underperforms, the other funds might make up for those losses, keeping your portfolio value steady. Consider diversifying your investment across both asset classes and sectors. For instance, instead of a pure equity or debt portfolio, consider dedicating a part of your funds to equity-focused schemes and a portion to debt-focused ones. This will help you hedge the risk associated with a single asset class.
Decide on the mode of investment
You can choose to invest in MF with a one-time lump-sum investment or go the SIP route, contributing a manageable sum at fixed intervals regularly. You may prefer SIPs for market-linked investments since it's easier to contribute monthly or quarterly rather than invest a lump-sum amount at once. Apart from investment ease, SIP investments come with the rupee-cost averaging benefit that helps lower the average cost of your investments over time, boosting returns.
Ensure your KYC papers are up-to-date
You cannot invest in mutual funds without a completed and up-to-date KYC (Know Your Customer). So, before you start shortlisting funds and building a portfolio, ensure your KYC procedure is completed. Most mutual fund investment platforms allow a quick digital KYC facility that can be completed with a valid PAN card and address proof.
Check if you are enrolled for net banking
An active bank account is mandatory when investing in mutual funds. Ideally, you should also have net banking access to buy mutual fund units. While there are other options like UPI, debit cards, and cheques, using net banking is advisable since it is easier, safer, and faster.
Seek help from a financial advisor
Mutual fund investments for beginners can be quite daunting, especially given the time, effort, and market knowledge needed. Funds in your portfolio need to be monitored and tracked. Your portfolio also needs to be reviewed and rebalanced periodically. All this can be challenging for a new investor. If you have trouble navigating the investment landscape and choosing the best mutual funds, it's prudent to seek help from a professional financial advisor. The financial advisor will review your investment parameters and help tailor your strategy accordingly.
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)
How to invest in mutual funds through SIP?
When investing in mutual funds, most beginners prefer using SIP investments. The next section of our mutual fund investment guide for beginners explores how you can invest in mutual funds using the SIP route:
- Before starting your mutual fund investments, you must first complete your KYC. To ensure compliance with KYC norms, you can fill out the KYC registration form online and submit valid identification and address proof documents along with your PAN details.
- To start investing in mutual fund SIPs, you need to register with the AMC or a broker. Visit the broker’s website to register online and create a mutual fund account. Depending on the registration process, you may have to provide your phone number, PAN, and other details.
- Next, select the mutual fund plan that best aligns with your financial objectives, investment horizon, and risk appetite. Consider factors like the fund’s performance, expense ratio, asset composition, and fund manager’s portfolio before picking a scheme.
- Enter your bank account details and select the SIP amount you wish to invest as well as the debit due date.
- Set up an auto-debit mandate for your SIP. This will ensure that your SIP amount is automatically debited and invested on a fixed date every month.
- Periodically monitor and adjust your portfolio if needed.
How to invest in mutual funds through lumpsum investment?
A lump-sum investment implies a single one-time payment made in full instead of periodic contributions. Beginners can also start investing in mutual funds with a lump-sum investment. You can set up a direct mutual fund investment plan with an asset management company to do so. You can open an account either online or offline with a self-attested identity and address proof documents along with passport-size photographs.
Once your KYC is completed, you can log into your mutual fund account, select the best lump-sum investment scheme, and choose the ‘lump-sum’ option. Next, you must enter the lump-sum investment amount and transfer the same using the net banking facility.
Tips for beginners investing in mutual funds
First-time investors often feel confused when starting their mutual fund investment journey. Implementing the following strategies and tips can help simplify mutual fund investing for beginners:
Focus on creating a diversified portfolio
First-time investors with a high-risk appetite can often get carried away with the return potential of equities, while those with a low-risk appetite may wish to preserve capital and settle for low returns with debt mutual funds. However, the key to investing is diversification. Mutual fund schemes invest your funds in different assets and sectors. Some invest it in equity stocks of blue-chip companies, while others focus on government bonds and debt securities. For better flexibility, hybrid funds divert a portion of their funds to equities and the other to debt and other assets.
For first-time investors, curating a diversified portfolio is crucial. A well-diversified portfolio that comprises a mix of asset classes and sectoral investments can help optimise returns and lower asset-specific risk exposure. For instance, if you have 2-3 equity funds in your portfolio, ensure that you also invest in some fixed-income assets to hedge against their intense volatility.
Maintain clear investment goals
As mentioned earlier, clear and specific investment goals are cornerstones of purposeful investments. Mutual funds are known for their adaptability. In other words, you can leverage mutual fund investments for various types of goals—be it short-term or long-term. In fact, liquid mutual funds can also serve as contingency reserves. Most mutual fund schemes offer easy liquidity (except ELSS funds), where you can redeem your investment anytime to meet an urgent cash crunch. Clear goals help ensure that your investments have a purpose and remain time-bound. They also help foster a disciplined investment approach and avoid impulsive decisions.
Leverage a buy-and-hold strategy
As a beginner, you may be tempted to sell equity fund units during market downswings. However, you should note that mutual funds perform best with a buy-and-hold strategy. This entails purchasing mutual fund units and holding them for an extended period, irrespective of the market conditions. Since historically, markets have always rebounded in the long run, a buy-and-hold strategy helps you weather short-term ups and downs. Your long-term gains balance out any short-term losses.
Invest in balanced funds
Most financial experts recommend balanced funds for beginners investing in mutual funds. Unlike equity funds, which focus on stocks and debt funds, which focus on fixed-income assets, balanced funds offer a mix of both. They invest in stock, debt, and, in some cases, other asset classes like gold to offer instant diversification to your portfolio. In other words, by investing in a balanced fund, you can avoid the hassles of individually selecting separate equity and debt funds to diversify your portfolio.
Choose to invest through SIPs
Most beginners investing in mutual funds prefer the SIP investment route. SIPs make mutual fund investments easier with periodic contributions instead of a one-time lump-sum investment. Moreover, choosing SIP investments also helps you leverage the power of rupee-cost averaging. In other words, you can buy more units when the market is falling and fewer units when it is rising, averaging out the total cost of your investment. This helps eliminate the need to time the market, which is challenging even for seasoned investors.
Understand when to withdraw your MF investments
Understanding when to stop your mutual fund investments is crucial. Many first-time investors get jittery when the market slows down, withdrawing their investment to prevent further losses. However, the key is to understand that markets recover in the long run, and a skilled fund manager knows how to make the most of a negative phase.
Essential tax strategies for first-time mutual fund investors in India
Implementing a few tax-saving strategies can help streamline mutual fund investments for beginners. The following tax-efficient investment strategies can optimise returns and effectively lower your tax liabilities:
Invest in ELSS
Equity-linked savings schemes (ELSS) are specially designed tax-saving mutual fund schemes. You can claim an annual tax deduction of up to Rs. 1.5 lakhs on your ELSS investment u/s 80(C) of the Income Tax Act of 1961. However, be prepared to hold your investment for at least 3 years, since ELSS funds come with a mandatory 3-year lock-in period.
Invest for the long term
As per the amendments proposed in the Union Budget 2024, the long-term capital gains (LTCG) tax on equities mutual funds is 12.5%, up from 10%. The LTCG tax is levied on equity mutual funds that are held for more than 12 months. However, the gains are exempted up to Rs. 1.25 lakh in a financial year (raised from Rs. 1 lakh), and you must pay taxes on LTCG exceeding this amount. On the other hand, if you sell your mutual funds before the 12-month period, you must pay short-term capital gains (STCG) tax of 20% (up from 15%)! Thus, it is prudent to invest for the long haul and benefit from a lower tax rate.
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.
