A step-by-step guide on how to invest in mutual funds

Published On: 08-Jul-2019
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Mutual funds offer you a wide range of investment options across asset classes, be it equity or debt, and even within the sub-categories of asset classes like mid-cap stocks, large-cap stocks etc. If you are wondering how to invest in mutual funds, this article aims to address that question and list down the ways to invest in mutual funds. Investors can invest via two modes: offline and online. We will discuss both modes one by one.

How to invest in mutual funds online?

With the advent of digital banking and digital investing, it has become possible to invest in mutual funds online with just a few clicks. Thanks to online mutual fund investment platforms, there is no need to physically visit the fund house for investing. While the steps may slightly differ with different website structures of the respective mutual fund house, the procedure below aims to broadly outline the steps of making online investments in mutual funds:

  1. Open the website of the mutual fund house, in which you wish to invest. The Registrar and Transfer Agents (RTA) like CAMS, Karvy etc., also allow investments with their clients’ mutual funds through their websites/mobile apps.

  2. Click the ‘Make a Transaction/Purchase’ button on the homepage or the respective scheme page.

  3. You may be prompted to input your PAN (Permanent Account Number). Once you enter the PAN number, the system will validate the same against the present database to check if you are an existing investor and have completed KYC.

  4. If you are a new investor and are yet to complete your KYC, the browser will redirect you to process your KYC verification online itself. Once you have completed your KYC, you can continue with your investment process.

  5. The online portal will prompt you to input the details one by one, starting with the scheme details, investment amount, bank details etc.

  6. Once you have entered all the details, the portal will check if you want to make a lump sum or SIP investment. In case of SIP, further details like the number of instalments, monthly SIP date, SIP amount etc. will also have to be entered. Further, once you input the details for SIP registration, you will receive a SIP Registration Reference Number, which you need to register for automatic bill payment with your bank through net banking.

  7. After you have entered the desired details, the system will redirect you to the payment gateway, where the payment is required to be made towards the investment.

  8. Upon successful payment, a transaction confirmation will be displayed on the screen with the time stamp. An email is also sent to the registered email address with the transaction confirmation, followed by the account statement.

How to invest in mutual funds through offline mode?

This is the traditional mode of making investments in mutual funds, wherein the form is submitted physically and thereafter, the entire data is digitized and processed. Here are the steps to invest in mutual funds through offline mode:

  1. Fill out the KYC (Know Your Customer) form along with the application if you are investing in mutual funds for the first time. KYC serves as your information repository for the mutual fund house and is required for making investments of more than ₹50,000 in a year.

  2. Fill out the application form for the desired mutual fund schemes, where the investment is to be made. This application form can be downloaded from the website of the respective mutual fund house or procured from the investor service centre of the mutual fund or the Registrar and Transfer Agent (RTA).

  3. You can also register for a SIP or Systematic Investment Plan, which allows you to invest a fixed sum every month into the mutual fund scheme of your choice.

  4. Submit the application form along with necessary enclosures/cheques at the authorized collection centres of the mutual fund or the Registrar and Transfer Agent (RTA).

  5. A time-stamped acknowledgement will be provided to you at the time of submission.

  6. On the next working day after the submission, you will receive a transaction confirmation message on your mobile number and the account statement with the transaction if you have also provided your email address.

So, now that you know how to invest in mutual funds, take your first step towards investing right away.

Things to consider before investing in mutual funds

Mutual funds are a good investment option if you are looking to create wealth in the long term. Before starting your journey in mutual funds, you should be aware of the below basics:

1. Choose the right type of mutual fund

The first question that may arise in your mind when you begin your investment journey is: how to choose the right mutual fund? There are various types of mutual funds such as equity funds, debt funds, hybrid funds, fund of funds, exchange traded funds, and more. Choosing the right type of mutual fund in India is important based on your risk appetite, income, time horizon, age and other factors.

Equity schemes

  • Invest in equities & related instruments
  • Ideal for long term growth as these may be volatile during the short term
  • Suitable for investors with longer time horizon and greater risk appetite

Debt schemes

  • Invest in bonds & debt securities
  • Further classified into short, medium and long term funds based on the tenor of held securities
  • Suitable for investors seeking income generation as well as capital preservation may go for such schemes

Hybrid schemes

  • Invest in a mix of equity and debt securities
  • Suitable for investors looking for balance between growth and income

Exchange traded funds

  • Listed on stock exchanges like a common stock
  • Track an index, bond, commodity, or basket of assets
  • Suitable for investors that seek returns similar to index along with liquidity like stocks

Fund of funds

  • Schemes that invest in the units of other mutual funds
  • Investment objective is based on the underlying fund’s objective

Equity linked savings scheme

  • Invests at least 80% in stocks
  • Has a lock-in period of 3 years
  • Suitable for investors seeking tax benefits under Sec 80C of the Income Tax Act (up to ₹1,50,000)

If you are unsure which mutual fund types would be suitable for you, you may consult a financial advisor.

2. SIP vs lump sum: How to choose?

Once you’ve figured out how to choose the right mutual fund, the next question is choosing between SIP vs lump sum. Difference between SIP and lump sum is that through an SIP you invest a specific amount periodically whereas in lump sum you invest the whole amount in one go. You may choose your mode of investment (lump sum vs sip) based on your budget, income and expenditure.

To make regular, disciplined investments at regular intervals, you may invest through an SIP. You may use an SIP calculator to get a better idea on your investments. SIPs are like recurring deposits and they come with multiple benefits such as convenience of regular investing, rupee cost averaging etc.

So is SIP better than lump sum investment? Not necessarily. To make one-time investments, such as at the time of receiving a relatively huge sum of money like an annual bonus, lump sum investments may be suitable. You may make a lump sum investment any time whenever you have surplus funds available with you and the marketing timing is right. However, timing the market is tough and that’s where SIPs help provide a simpler, systematic approach to disciplined investing for the long term.

3. Difference between growth and dividend

Among the mutual fund types, the only difference between growth mutual fund and dividend is that under the growth option, the profits are re-invested, whereas in mutual fund dividends, the profits are distributed. The Net Asset Value (NAV) of the growth option may be higher than the dividend option. This is because re- invested profits may grow in value over time.

4. Fund manager

As against doing your own research to invest in individual stocks, mutual funds come with the benefits of being managed by professional fund managers. When you look for a suitable scheme to invest in, you may check the fund manager who is managing that particular scheme. Asset management companies (AMCs) list their fund managers’ profiles and background information on their website and in the scheme-related documents for easy reference.

5. Expense ratio

Different schemes and plans have different expense structures and thus varying total expense ratio. Some schemes are passively managed, hence there’s less active involvement of fund managers and research analysts. Such schemes may incur lower expenses and thus may have a lower expense ratio. The mutual fund expense ratio directly affects returns, so if it’s lower, the returns will be higher and vice versa. Within the same scheme, there may be a difference in the expense ratio between direct and regular plans. Usually the direct plan has a lower expense ratio than the regular plan. This is because no commission is paid/charged from the direct plan. Therefore it is helpful to check the total expense ratio before investing in a mutual fund scheme.

How do beginners invest in mutual funds?

Beginners need to first chalk out their financial goals, both big and small. Once the goals are set, they may make note of their investment tenure, risk appetite and budget. Then they may check out the schemes that have the same goal, risk level and tenure. In case of any doubts, one may reach out to his/her financial advisor for guidance.

How do I start investing in mutual funds?

If you have never invested in mutual funds, the first step would be to complete the KYC compliance. This can be done digitally through e-KYC as well. For e-KYC, you may visit the AMC website, enter your PAN and other required details, upload the requested documents, and verify your identity digitally. Some of the documents you would need include scan copies/clear images of PAN card, address proof, cancelled cheque and signature. Once you are KYC compliant, you may begin investing in the funds of your choice.

Disclaimer:

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

SIP is a feature offered for a disciplined investment of a certain amount on a pre-decided date in a specific mutual fund scheme, regularly over a period of time.

Equity Linked Savings Scheme (ELSS) is an open-endedequity linked saving scheme with a statutory lock in of 3 years and tax benefit. Minimum investment in equity & equity related instruments - 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance). As per the present tax laws, eligible investors (Individual/HUF) are entitled to deduction from their gross total income, of the amount invested in equity linked saving scheme (ELSS) upto Rs. 1,50,000/- (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961. Subject to prevailing tax laws.