If someone comes to me and says, ‘give me your money and I’ll double it in 2 years’, you will just close the door on that person. That’s because it is too good to be true. If this were the case all of us would be stinking rich, and we would read cases of financial fraud every day in the newspapers. So, how can you trust anyone with your money? That said, if we want to get rich with our savings, we need to invest smart.
The first step is by educating ourselves about mutual funds and their long-term benefits as investment avenues. Are you an investor seeking some guidance as you undertake your journey into mutual funds investments? Then read on, as we discuss, in this article, about what mutual funds are, the different types of MFs, ways to pick the best MF, and a step by step tutorial on how to invest in mutual funds online.
What are mutual funds and what are their different types?
Mutual funds collect different denominations of money from multiple investors and create money pools. A fund manager then uses this pool to invest in stocks, bonds, and various asset classes based on the investment objective stated in one’s investment plan. We don’t have to worry about where it is being invested, because the fund manager takes care of it for a commission of around 1-2%. If you want to invest long term, mutual funds are great options, because your money earns you more money!.
The question that you might have is how one can be sure about the security aspect of a mutual funds investment. The answer to this question is that since mutual funds are regulated by SEBI, a safety breach is highly unlikely. However, if you chose a bad fund manager, then he/she might lose your money by investing in bad stocks. The key is to appoint a reliable stockbroker and carry out extensive research before plunging in.
First, let’s take a look at the different types of mutual funds available. There are 3 major types of mutual funds:
The question that you might have is how can you be sure that the mutual fund will not run away with your money. Mutual Funds are regulated by SEBI. So, running away is highly unlikely. However, if you chose a bad fund manager, then he/she might lose your money by investing in bad stocks.
First, let’s find out the different types of mutual funds available. There are 3 major types.
- Equity Funds: Stocking Up the Stocks!
These mutual funds invest in shares and stocks of companies. They are considered high-risk investments, but they also yield high returns. Equity funds may further be classified into different categories, based on factors such as the types of companies whose securities they invest in (i.e. small-, medium- or large-scale companies); whether they invest in domestic or international stocks; the domains they invest in etc.
- Debt Funds: For a Steady Income Inflow
Debt investment funds are those that invest in debt instruments such as debentures and bond investments. They are safe investments but their returns are also lesser compared to equities. However, many “conservative” investors prefer bond funds to avoid the risks involved in stock investments.
- Hybrid Funds: Best of Both Worlds!
As the name suggests, hybrid funds are the points where stocks and bonds integrate into each other to maximize returns and off-set risks. These funds invest in equity as well as debt funds in specific proportions, such as 50%-50% or 70%-30%.
- Other Types of Mutual Funds
Then there are Sector Funds, Gilt Funds, and Tax Savings Funds, which are also quite easy to understand; however, it is essential for a beginner to primarily understand the three types of mutual funds listed above.
How to pick the best mutual fund?
One reason why most of us worry about investing in mutual funds is the fact that there are dime a dozen present in the market. This makes it a challenging task for investors to earmark the best mutual funds to buy. We don’t know which one to pick. This always poses problems with regard to MF investment. So, before you chose mutual funds to invest in, remember these 3 points:
1. Investment time horizon
Short-term horizon: If you want to invest short term, say 1 or 2 years, then debt Funds will be the best option. This is because they are low in risk compared to Equity, and they also yield more returns than a bank.
Long-term horizon: If you want to invest long term, there are 2 options: lump-sum and SIP. Lump-sum is when you invest a huge amount, say Rs. 1 Lakh, all at once. On the other hand, SIP or Systematic Investment Plan is an investment scheme in which you choose to invest specific amounts of money, say Rs. 1000 or Rs. 2000, at regular intervals. So, during these fixed intervals, the amount will directly move from your Savings Account to your MF account. If you are new to mutual funds, SIP is the best option.
2. Which mutual fund to pick?
Mutual funds are generally categorized into large-caps, midcaps, and small caps. Largecap schemes invest in big companies that are already well established. So, the risk is less. Midcap schemes come with Moderate Risk, but Moderate Returns. Smallcap schemes, invest in even smaller companies. Thus, they come with High Risk but returns will also be high. If you are new to mutual funds, it is recommended that you pick a large-cap fund.
A majority of first-time mutual funds investors are often confused about how to pick mutual funds that maximize profits and minimize risks. Here’s a bifurcation that might help beginner investors make wise investment decisions.
Mutual funds are generally categorized into large-caps, mid-caps, and small-caps.
- Large-cap schemes invest in big companies that are already well-established. As a result, these are the least risky mutual funds.
- Mid-cap schemes entail moderate risks and moderate returns.
- Small-cap schemes invest in even smaller companies. Thus, they entail high risks but hold a possibility of maximum returns. If you are new to mutual funds, it is recommended that you pick a large-cap fund.
3. Parameters that you need to check before selecting a mutual fund
Returns: Before investing in mutual funds, carry out extensive research of the past success rate of the particular mutual fund. Check at least 10 years of their track record, and invest only in those mutual funds whose parent companies have been consistently successful in their investment ventures.
Expense Ratio: It is also important to determine the amount charged by fund managers for maintaining your account. This amount usually ranges between 1-3%
Entry and Exit Load: Before investing, gauge the fees for entering and exiting that scheme, and make an informed investment decision accordingly.
4. How to Open a Mutual Funds Account Online?
Choose the fund that best meets your investment objectives.
2. Figure out how much money should you invest
a. Select the mutual fund you want to opt for.
b. Choose the fund that best meets your investment objectives.
c. Figure out how much money should you invest.
d. Choose the best monthly SIP option to meet your financial goal. For that, you can use the SIP Calculator, which most top online brokers will provide on their website. Assume that in the next 15 years, you want to make Rs. 1 Crore. The average Expected Rate of Return for any mutual fund is around 16%.
e. Click on the ‘Calculate’ button. It will show you need to invest around Rs. 13,000 every month for the next 15 years to make a corpus of Rs. 1 Crore.
f. You can even use the Return Value Calculator. In this calculator, you need to first enter how much money you can invest every month. Let’s assume it is Rs. 2,000/-. Let’s also assume that you will invest it for the next 10 years. As we know, the average Expected Rate of Return for mutual funds is 16%. Click on the ‘Calculate’ button.
This means that when you invest Rs. 240,000/- over 10 years, your expected accumulated wealth will be around Rs. 6 Lakh. That will only happen if you invest Rs. 2000/- for the next 10 years.
g. Get ready for KYC
The next thing you need to start a mutual fund account is address proof (aadhaar card, driving license PAN card etc., which are KYC Compliant.
h. Finally, after doing these 3 things, you can either visit that mutual fund’s branch office or visit their website. You’ll just have to enter your details, SIP amount and duration, and your account will be set up. It’s as simple as that! That’s all it takes to set up a mutual funds account. Isn’t that easy? Some basic knowledge on how to pick mutual funds and timely support from a reliable stockbroker is really all it takes!
To start your mutual fund account or to know more on investing in mutual funds write us at [email protected]
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.