Everything You Need To Know About Investing in Mutual Funds

A mutual fund collects money from many investors and invests it in assets such as stocks, bonds, or other securities, depending on the scheme's objective. These investments are managed by a professional fund manager.

Mutual funds allow you to invest without selecting and managing every security yourself. Investors can earn potential returns if the value of their mutual fund units increases or if the scheme makes a distribution. However, returns on mutual fund investments are not guaranteed, and the value of your investments can also fall.

Let’s understand how you can invest in mutual funds

Buying Mutual Fund Units

When you invest in a mutual fund, you receive units of the scheme. These units represent your share in the fund's overall portfolio. By investing in one mutual fund, you can gain exposure to several investments within its portfolio. There are different types of mutual funds you can choose from, such as equity, debt, index, fund of funds, and hybrid funds, based on your risk profile and investment goals.

Direct Vs Regular Plan

There are two main plan options when investing in mutual funds: direct and regular. In a direct plan, you invest without a mutual fund distributor. In a regular plan, you invest through a distributor who may help you choose and purchase schemes.

Direct plans generally have lower expense ratios as they do not include distributor commissions. Regular plans have higher expenses but may provide access to distributor support.

Both plans are managed by the same fund manager and have the same underlying portfolio. If you need personalised financial advice, you can also consider a registered investment adviser.

Choose a Mutual Fund

Once you choose a mutual fund plan, you can either hold your units in a Demat account through a brokerage house or opt for the Statement of Account (SoA) mode when investing through an Asset Management Company (AMC) or its designated Registrar and Transfer Agent (RTA), such as CAMS or KFintech.

You should complete your KYC (Know Your Customer) to start investing in mutual funds. Choose mutual funds based on your financial goals, risk tolerance, investment period, and investment strategy.

Investors can review the fund’s past performance, among other factors such as the Sharpe ratio, expense ratio, standard deviation, and the Treynor ratio. However, a fund’s historical performance does not guarantee future returns.

Read the Scheme Information Document (SID) provided by the AMC, which is an official document containing scheme-specific details about the mutual fund, such as its investment objective, asset allocation, strategy, risks, benchmark, fees, expenses, and operational rules.

There are two main categories of mutual funds: open-ended and close-ended. In an open-ended fund, you can buy or redeem units at any time based on the daily NAV, whereas in a close-ended fund, redemption is generally restricted until maturity, although you can trade units on a stock exchange before then, subject to market liquidity.

Choose Investment Approach

Once you’ve chosen the type of mutual fund you want to invest in, you have two investment options: lump-sum and SIP (Systematic Investment Plan).

With a lump-sum investment, you invest an amount upfront in a mutual fund, while with an SIP, you invest a fixed amount at regular intervals. Investors can select the amount and frequency of their SIPs, offering flexibility.

You can set up an automated SIP, which will automatically deduct the SIP amount from your bank account and invest it in the selected mutual fund. You can choose to pause or stop your SIP anytime, but following the applicable process and conditions.

FAQs

What is the difference between SIP and lump-sum investment?

SIP lets you invest a fixed amount regularly, while lump-sum investment means investing a large amount at one time.

What is the difference between direct and regular mutual fund plans?

Direct plans do not involve distributor commissions and usually have lower fees, while regular plans include distributor commission and hence may have higher fees.

Do I need a Demat account to invest in mutual funds?

No, you don’t need a Demat account to invest in mutual funds. You can also hold mutual fund units in Statement of Account (SoA) mode.

How do I choose the right mutual fund?

You must choose a fund based on your financial goals, risk tolerance, investment period, fees, and investment strategy.