How to Invest in Mutual Funds?

Mutual funds are one of the most popular investment options used for generating wealth. Whether you invest in these funds through a broker or you invest in them yourself, here is what you must know about mutual funds.

A mutual fund is a collection of savings which is contributed by many investors. The pool of funds that get created is invested in various asset classes such as debt, equity, liquid assets, etc. These funds are named as mutual funds as the risks and rewards are mutually shared by all the investors in proportion to their contributions.

The Mutual funds are registered with SEBI (Securities and Exchange Board of India), which recognizes and approves the AMC (Asset Management Company), which in turn manages the funds.

Who can all invest in mutual funds?

Anyone can invest in mutual funds like individual investors, NRI’s, companies, trusts, partnership firms, banking, and non-banking financial institutions, etc.

Why should you invest in mutual funds?

There are plenty of reasons for you to invest in mutual funds. The most important ones have been listed here:

Start with less price: The investment value for mutual funds can be as low as Rs. 100. The mode of investment is quick and convenient.

Diversified risk: Being a beginner, you might not know about the good, bad and average performing funds. Hence, investing in mutual funds give you a good risk coverage as good stocks will overshadow the low performing funds reducing your risk to a minimum.

Easy to invest: There is not much of the documentation needed to invest in mutual funds. The process of mutual fund investment is easy, quick and totally paperless. You can choose to invest in mutual funds from any part of the world.

Redeem anytime: You can redeem your funds anytime you wish to withdraw. This is great ease and flexibility that comes with mutual fund investment.

When should you not invest in mutual funds?

Though mutual funds’ investments are considered to be a safe bet, yet, you must refrain from mutual fund investment under the following circumstances:

1.     If you are willing to invest in mutual funds only for a short period, then you must instead not invest in them. As these funds experience fluctuations in the prices in the short term which can negatively impact your returns.
2.      Mutual funds may show variation in returns each month. So, it is not a good idea to invest in them if your monthly expenses are dependent on the earnings from these returns.
3.     Funding your home, educational or car EMI from mutual fund returns is almost impossible. This is so because significant gains from mutual funds are expected only in the longer run.

Risks in investing in mutual funds

There are plenty of risks involved in investing in mutual funds too, which are as follows:

•    The mutual fund price fluctuations are dependent on the political climate of the country.

•    Mutual fund investments are subjected to market risks. Your finances are always at risk of losses due to variation in the market factors.

•    The mutual fund investments in debt instruments are subjected to the risk of non-repayment of bonds by the issuer.

Expenses and fees incurred while buying mutual funds

For buying mutual funds, you have to incur some costs which are as follows:

Mutual fund charges: An Asset Management Company (AMC), works with a team of financial analysts and market experts which constantly research the funds and hence charge a fee for providing their services.

Expense Ratio: It includes distribution expense and fund management fee which is paid to the AMC.

Exit load/Back-end load fees: The back-end load fee is charged when the funds are sold within a given time frame. The back end load fee is highest for the first year and then goes down each year after that.

These were specific important points that you must be aware of as a beginner to invest in mutual funds. Mutual funds serve as one of the best bets for investment provided you plan to stay invested for longer.