Investing in mutual funds has become one of the most preferred ways of new and old investors to enter the financial markets. The simplicity and diversification of service and professional management offered by them make them good choice. But in order to get returns which have meaning then the investment has to be done with clarity and proper planning. This guide breaks down how to invest in mutual funds in a step by step manner, ensuring that it is in a reviewer oriented way with an objectivity, clarity and ease of understanding key.
What are Mutual Funds?
Mutual funds take the money of a number of investors, and invest the money in a diversity of securities, including stocks, bonds, and money market securities. This is the least risky method with the diversification and gives the investor an advantage to gain profits from the professional management of the fund.
From user perspective main reason for choosing mutual funds is that the users need not have much knowledge about the market or any active monitoring. They help the investors to devote low down and make a disciplined investment habits.
Why Mutual Funds- Good place For a Beginners to Start
Before getting into the “how,” however, it’s helpful to understand a few of the causes of the popularity of mutual funds:
- They offer diversification which is helpful in reducing portfolio risk.
- With them comes the professional fund manager to deal with the research and investment decisions.
- They have flexibility of lump sum/sip (systematic investment plan) options.
- They are the easy to get in and out of and are regulated by SEBI.
This makes mutual funds ideal for anyone who are looking for a balanced way to increase their wealth over time.
Step 1: Know What Your Investment Goals Are
Every investor comes in the market with his or her own expectations. Goals could be for saving for a home, planning for retirement, funding education or increasing wealth on a steady basis.
When selecting mutual funds, the justification is what becomes the base. Short term goals are more consistent with debt funds due to the stability whereas, with long term goals equity funds can help as they are more stable and they have the potential to give great returns when it comes to market volatility.
Step 2: Be aware of the kinds of mutual fund available
Mutual funds available are of manifold types. It is important to understand these in order to enable investors to make better choices.
1. Equity Funds
Put mainly in the stocks of companies. Suitable for long term wealth generating as well as having good growth potentials.
2. Debt Funds
Invest into the fixed income securities like the bonds, government securities etc. These tend to be lower risk and great for a short to medium term goal.
3. Hybrid Funds
Debt and equity: to use the debt and equity as a combination in order to give a balanced approach to moderate risk investors
4. Index Funds & ETFs
Follow some Market Indices. They are passive and cheap, and they are ideal for persons who are looking at getting stable returns that are linked to the market.
5. Sectoral or Thematic Funds
Invest in some shape or form of Industries (pharma, technology, banking etc.) These have had the “high returns with high risk.”
It is a good idea to know clearly what kinds of funds are in order to be individual the product for the personal objective and the degree of risk.
Step 3: Identify Your Risk Profile
Risk tolerance varies from individual to individual. Some can suffer the fluctuations of the market and take it comfortably, some want to be taken more often with constant returns. A self-screening often either through online screening or through apps assist in categorising the investors into branding either:
- Low-risk investors – likely to want to own debt, or hybrid funds.
- Moderate-risk investors – might want to consider balanced or hybrid funds.
- High-risk investors – usually go for equity funds which are for long term growth.
To properly identify risk appetite is to make a better selection of funds as well to make less emotional decision about investing.
Step 4: KYC Filling Up & Formation of Investment Platform
In order to invest in mutual funds in india it is mandatory to make the KYC ( Know Your Customer) Process. This requires Pan Card, Aadhaar and basic verification.
KYC is more important for investors and once it has been done, the investors are able to utilise:
- Asset Management Company (AMC) Website
- Investment apps
- Banks
- Online Trading Platform e.g Groww, Zerodha or Paytm Money
The platform should having transparency, easy tracking capability and low charges.
Step 5: Comparing Before Investing Mutual Funds
A thinking strategy that is helpful in this is a reviewer strategy. Before investing, examine:
- Past performance (no indicator to future performance)
- Expense ratio (Low ratios means saving of costs)
- Fund manager expertise
- Portfolio composition
- Risk level
- Benchmark comparison
- AUM (Assets Under Management)
Funds which have a long running and stable performance on the long term and a stable management are usually more reliable than
Step 6: Choices of SIP vs. lump sum Investing Alternating
Mutual funds are a good way to invest, because they have two major ways of doing so:
SIP (Systematic Investment Plan)
- Best suited to people who have a salary
- Helps in averaging out volatilities of the market
- Encourages a disciplined and long term saving
Lump-Sum Investment
- Suited in case of large amount of investors ready
- Works well with stable or up value market
Both the modes have advantages of their own. Many investors employ some combination of the two.
Step 7: Monitor and Review your Investments on a Regular Basis
Mutual funds don’t need to be constantly monitored, but periodic review every 6 to 12 months associated with it helps to be sure that they’re as aligned with goals. Investors should check:
- Whether the fund is performing on consistent basis under performing
- Whether or not there has been a change in the risk profile
- Whether or not the goals or the level in income changed
It is the need of the hour always to revert to better performing funds.
Step 8: Be patient Do NOT Make an Emotional Decision
Markets go up and down and so do mutual fund revenues. Since it is the emotional response that is more likely to make the investor sell now or chase down returns. Consistency and patience is the key to long term success.
Conclusion
It is more of a process of mutual funds investing it is easier to learn when you understand the process. Understanding personal goals, right type of fund, understanding of risk, right investment platform and the periodic review of performance are the pillars of successful mutual fund investment strategy. With the right discipline and planning, mutual funds is one of the most effective tools of long term financial growth.
Also Read: How to Buy NFT: A Step-by-Step Guide for Beginners
