How to invest in mutual funds- Simple steps

Mutual funds remind us of the advertisements on television. The sentence that says, ‘mutual funds are subject to market risks.’ This risk factor often confuses us whether to invest in it or not. You need to know different aspects and types of mutual funds to understand their benefits. 

Here’s a complete guide on how to invest in mutual funds!

What are mutual funds?

It is a professionally managed investment fund that collects investors’ money to purchase securities. It is created when an asset management company (AMC) collects investments with the same objectives. The fund manager manages these investments. The fund manager strategically invests in securities to generate maximum returns.

Fund managers are people with an excellent track record of managing investments. They have an in-depth understanding of the market. They take annual charges for managing your investments. 

The mutual fund investors gain returns through regular dividends or interest and capital appreciation. They can use this return in two ways. They can either use the growth option and reinvest the money, or they can use the dividend option to make it a source of steady income.

Types of mutual funds

There are three main types of mutual funds. They are as follows-

Mutual funds based on asset class

There are three asset classes in mutual funds. They are the debit funds, equity funds, and hybrid funds. Let’s know more about them-

• Debit funds- They are also known as fixed-income funds. They invest in assets like government securities, corporate bonds, and money market instruments. They offer regular returns to the investors and are known to be stable.
• Equity funds- These funds invest a primary portion of your money in stocks. The main objective of these funds is capital appreciation. The returns on equity funds are linked to market fluctuations. That’s why they are considered to be risky. Yet, they can be a good choice for long-term investments.
• Hybrid funds- If you want to get a middle ground, then these are the funds for you. They give you equity and debt in investments. These funds are categorized into six types based on their asset allocation. They are as follows-

No.	Hybrid funds	Debt instruments	Equity
1	Conservative hybrid fund	75-90%	10-25%
2	Balanced hybrid fund	40-60%	40-60%
3	Aggressive hybrid fund	20-35%	65-80%
4	Equity savings fund	10%	65%
5	Multi-asset allocation fund	10%	10%
6	Arbitrage fund	–	65%

Mutual funds based on structure

These mutual funds also have three types. They are as follows-

• Open-funded mutual fund- Just like the name suggests, it is the kind of mutual fund where you can invest at any time. They have a Net Asset Value (NAV). They can be a good liquid fund option that you can use to sell or redeem fund units.
• Close-ended mutual fund- This kind of fund comes with a maturity date. You can invest in this fund only when they are launched. You can withdraw this money only after the maturity date.
• Interval funds- It contains qualities of both open and close-ended funds. Interval funds don’t allow investors to buy or sell units. They invest in both debt and equity securities.

Mutual funds based on investment objectives

These mutual funds are classified based on their objectives into four categories.

• Growth funds- The main objective of this fund is capital appreciation. They invest a significant amount of your money in stock and growth sectors. They are known to be risky.
• Income funds- These funds offer regular income to the investors. They are debt funds that invest in bonds, debentures, commercial papers, government securities, and certificates of deposit. 
• Liquid funds- They provide liquidity to the investors. They put money in the short-term money market instrument. They are a great option if you want to create emergency funds.
• Tax-saving funds- These funds offer tax benefits. After investing in this fund, you can claim a deduction of the funds up to INR 1.5 lakhs. They can be a good option for primary investment goals. 

How to invest in mutual funds?

The first step to investing in mutual funds is KYC (Know Your Customer). This is a term used for customer identification. To become KYC complaint, you need the following documents-

• Recent passport-size photo
• PAN card
• Adhar card
• KYC form

After becoming a KYC complaint, you can invest in mutual funds. There are several ways by which you can invest.

Through distributor

Funds distributor is a person who has the authority to help you with mutual funds investments. They are registered with the Association of Mutual Funds India (AMFI). If you buy mutual funds units through a distributor, they will have a higher value than directly purchased units from AMC. The fund distributors do not charge fees from investors.

Direct purchase by AMC

The Annual Maintenance Contract (AMC) is made for the purchase of mutual funds units. You can visit the office or their website for it. You just need to submit KYC documents and choose your investment plans.

• Registered Investment Adviser (RIA)

These are SEBI registered advisers. They don’t receive any commission from AMC, but they can charge the investors for their investment advice. 

• Registrars and Transfer Agents (RTA)

These agents process mutual funds transactions on behalf of the fund house. You can visit the office or their online portal for more information. 

Key takeaways

• Before investing in mutual funds, you have to study the risks and benefits of the investments.
• Mutual funds have several types. You need to determine your objective of investment before making the decision.
• KYC is a must for making mutual funds investments. 

Hope you find this information helpful. Write us your valuable feedback. Click here to read more such articles. 

Liked this blog? Read next: How to start investing in the stock market – tips & tricks

FAQs

Q1. How should beginners invest in mutual funds?

Answer – Beginners can invest in mutual funds through mutual funds house or a broker.

Q2. What are the 4 types of mutual funds?

Answer: The four categories of mutual funds are money market funds, bond funds, stock funds, and target date funds. 

Q3. What is a better option than mutual funds?

Answer: Exchange-Traded Funds (ETFs) are more tax-efficient and more liquid than mutual funds.