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, otherwise all of us would be stinking rich, and every day in the newspaper we read there is some financial fraud happening somewhere. 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 an investment avenue. In this article, we will cover what a mutual fund is, and the different types of MFs, ways to pick the best MF, a step-by-step tutorial on how to open your mutual fund account.
What is mutual fund and what are the different types?
Mutual fund collects money from people like us. Rs. 500 from one, Rs. 1000 from another, Rs.2000 from the next one and creates a money pool. A fund manager then uses this pool to invest in stocks, bonds, and various asset classes based in the investment objective. 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 a great option because instead of sitting idle, your money will go and earn for you.
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.
These mutual funds invest in shares and stocks of companies. They are considered High Risk, but they also give High Returns.
These mutual funds invest in debt instruments such as debentures and government bonds. They are safe investments but their returns are also less.
As the name suggests, they are a hybrid. They invest in both equity as well as debt. May be 50%-50% or 70%-30%. Their aim is to give you moderate returns at moderate risk.
Then there are Sector Funds, Gilt Funds, and Tax Savings Funds, which are pretty easy to understand, but for now, let’s stick to the basics.
How to pick the best mutual fund?
One reason why most of us worry about investing in a mutual fund is the fact that there are dime a dozen present in the market, which confuses us to no end as to choosing the best ones for us. We don’t know which one to pick. This always poses problems with regards to MF investment. So, before you chose a mutual fund 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 don’t chose Equity Funds. Debt Funds will be the best option. This is because they are low risk compare with Equity, plus, they give 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 give a huge amount, say Rs. 1 Lakh, all at once. On the other hand, SIP is Systematic Investment Plan where you chose say Rs. 1000 or Rs. 2000 and every month, that 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 categorised into largecaps, midcaps, and smallcaps. 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 largecap fund.
3. Parameters that you need to check before selecting a mutual fund
Returns: How much has that Mutual Fund made in the past. Check at least 10 years of their track record.
Expense Ratio: How much will that fund manager charge you for maintaining your account. It usually ranges between 1-3%.
Entry and Exit Load: Fees for entering and exiting that scheme.
These are the 3 things that you must keep in mind before you pick a mutual fund. Now, it’s time for the step-by-step tutorial on how to open a mutual fund account.
1. Select the mutual fund you want to opt for
Choose the fund that best meets your investment objectives.
2. Figure out how much money should you invest
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. Suppose 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%. Click on the ‘Calculate’ button. It will show you need to invest around Rs. 13000 every month for the next 15 years to make a corpus of Rs. 1 Crore. You can even use the Return Value Calculator. In this calculator, you need to first enter how much money can you invest in every month. Let’s assume it is Rs. 2000/-. 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
3. Get ready for KYC
The third thing you need to start a mutual fund account is address proof (aadhaar card, driving license PAN Card , which is KYC Compliant.
Finally, after doing these 3 things, you can either go to that mutual fund’s Branch Office or you can visit their website. You’ll just have to enter your details, your SIP amount, the duration, and your account will be set up. It’s as simple as that! That’s all it takes to set up a mutual fund account. Isn’t that easy? to start your mutual fund account
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.