Trading mutual funds for beginners includes investing in diversified mutual funds. It's a way to access various assets without requiring extensive market knowledge, offering potential for growth or income based on the fund's objectives and performance.
Investing in mutual funds has gained considerable popularity in recent years to increase savings and maximise earnings. Trading mutual funds is an important step in your financial journey which involves buying and selling shares of mutual funds to add more diversification to your portfolio.
This guide to trading mutual funds for beginners will help you understand how to start trading mutual funds, investment strategies, charges, and much more.
Understanding mutual funds for beginner investors
A mutual fund combines or pools money from a large number of investors to invest in commodities, bonds, stocks, short-term debt, and even real estate.
It can be treated as a diversified bucket of different asset classes that are maintained and managed by expert professionals of Asset Management Companies (AMCs).
Mutual funds represent a form of indirect investment, where each share owned by an investor signifies a proportional stake in both the fund itself and any income it produces.
What is mutual fund trading?
As the name suggests trading mutual funds means buying and selling mutual fund shares in the open market. Mutual funds have become highly sought-after instruments of investment
since they have low minimum investment requirements, are professionally managed, are tax-efficient, and provide greater liquidity than real estate and fixed deposits.
Mutual fund trading refers to the process of buying or selling units of a mutual fund. Understanding how these transactions work can help investors make better decisions.
1. No real-time trading
Unlike stocks, mutual funds do not trade throughout the day. All buy and sell orders are processed at the end of the trading day based on the fund’s Net Asset Value (NAV). NAV reflects the fund’s per-unit value after considering its assets and liabilities. This end-of-day pricing ensures all investors transact at the same price, offering fair execution.
2. Types of transactions
- Buying units: Investors can invest through a lump sum or set up regular contributions via a Systematic Investment Plan (SIP).
- Selling units: You can redeem your units whenever needed. Redemption amounts are usually credited to your bank account within a few working days.
3. How mutual fund trades are executed
Trades are placed directly with the fund house or through distributors, online aggregators, or investment platforms. Since mutual funds do not trade on stock exchanges, there is no secondary market involved. This makes the process simpler and more beginner-friendly.
4. Designed for long-term investing
While stock traders may prefer frequent buying and selling, mutual funds are built for long-term wealth creation. Investors are encouraged to stay invested, review their portfolio periodically, and rebalance when necessary rather than engage in constant trading.
Different types of mutual funds for beginners?
Investors can choose from a wide variety of funds depending on their risk tolerance, investment goals, and desired asset allocation. Here are three main types of mutual funds that you can select from based on asset class:
- Debt funds: These are invested in government securities like government bonds, and treasury bills that provide a steady income. They are ideal for investors looking at short-term horizons and not wanting to take any risk.
- Equity funds: These are funds that get invested in the shares of businesses and companies. These are ideal for long-term investments that generate high returns and are risk-averse.
- Hybrid funds: They are a mix of equity and debt funds ranging from low to moderate risk that aim for both growth and stability over time.
- Tax-saving mutual funds (ELSS): Equity-Linked Savings Schemes (ELSS) offer tax deductions under Section 80C of the Income Tax Act, 1961. With a mandatory three-year lock-in period, these funds are ideal for investors who want to save tax while also building long-term wealth through equity exposure.
- Index funds: Index funds track a specific market index such as the Nifty 50 or BSE Sensex. They are low-cost, simple to understand, and well-suited for beginners who prefer a passive investing approach without the need for active fund management.
- Money market funds: Money market funds invest in short-term, highly liquid instruments like treasury bills and certificates of deposit. They are designed for investors seeking safety and quick access to their money. Although returns are relatively lower, the risk is minimal and liquidity is high.
How to start trading mutual funds for beginners?
You can start trading mutual funds for beginners in India by following the below-given steps:
1. Define your risk tolerance and financial goals
Before trading mutual funds, it is always advisable to define the purpose of the investment - be it retirement, your child’s education or marriage, buying a home, etc. This will give you clarity and help you identify the right investment instrument for your goals.
2. Get all the necessary documents in place
Before you start investing in mutual funds in India you will have to complete and comply with all Mutual Funds KYC (Know Your Customer) regulations. This will include having documents like a PAN card, Aadhar card, address proof, and photographs.
3. Set up a bank account
A bank account is necessary for trading mutual funds. You will need to link your bank account with your mutual fund investment to facilitate purchases and redemptions.
4. Identify the right mutual fund
Different mutual funds come with varied levels of risk and return percentages. You should choose the one that aligns with your financial ambitions. Research the different types of funds and their allocations before trading mutual funds. You can also consult a financial advisor for a more optimized selection based on your risk profile and investment goals.
5. Choose an investment avenue
You can invest and start trading in mutual funds for beginners in different ways:
- Direct investment with asset management companies (AMCs): Directly apply through websites or offices of AMCs. Since this method has no intermediary, it will have a lower expense ratio.
- Through a broker or financial advisor: You can also opt for professional advisors or brokers, but they will charge you a fee or a commission for the services they offer.
- Online apps and fintech platforms: Numerous online platforms can help you in investing and trading mutual funds. Some also offer tools for tracking and analysis.
6. Decide on the mode of investment
You can invest a lumpsum amount in one go or opt for a systematic investment plan or SIP - monthly or quarterly to build a habit of saving.
7. Review and rebalance investments as and when need arises
Monitor the performance of the mutual fund periodically. With time your goals, market conditions or risk tolerance appetite may change. Hence, reviewing and rebalancing your fund allocation and portfolio is advised accordingly.
What are the charges associated with mutual funds?
- Exit load: This fee is charged for selling mutual fund shares within a specified period after purchase to discourage early withdrawals.
- Management fees: It is also called management expense ratio (MER) and it covers the cost of managing the fund's assets.
- Sales and distribution fees: They cover the marketing and distribution expenses of the fund.
- Transaction Costs: It is the costs incurred from trading activities within the fund, affecting the fund's overall performance but not directly charged to investors.
- Switching Fee: It is a fee that can be charged when switching investments between mutual funds within the same fund family.
Tax strategy for trading mutual funds for beginner investors?
Here are a few strategies you need to keep in mind to get the maximum benefits from your mutual funds training:
- Hold your mutual fund investments for more than a year to avoid the short-term capital gain tax which is higher than the long-term capital gains tax
- Sell your mutual funds that have declined in value to offset long-term capital gains tax. This strategy, known as tax-loss harvesting, can help reduce your overall tax liability.
- Invest in tax-efficient funds like ETFs and index funds, since they are more tax-efficient than actively traded funds.
- Systematic Withdrawal Plans (SWPs) can be used to plan withdrawals from mutual funds in a tax-efficient manner, particularly from debt funds, as it helps spread the tax liability over several years and potentially reduce it through indexation.
Conclusion
With this trading mutual funds for beginners guide you can start a rewarding investment journey. Always be mindful of your financial goals and then select the mutual fund that fulfills those requirements. Also, plan well in advance for your taxes and the fees you will incur and decide accordingly.
The Bajaj Finserv Mutual Fund Platform can be your trusted ally on this journey. It helps you compare mutual funds, and choose the right mutual fund schemes to meet your financial needs.
With its lumpsum calculator and SIP calculator, you can also make an informed decision about how much to invest and estimate potential returns.
So start your trading mutual funds smartly with the Bajaj Mutual Fund platform.
