If you are a first time investor or completely new to mutual funds, you have come to the right article. Today we are going to discuss the importance of investing in mutual funds and things necessary to invest and also discuss how to invest in mutual funds.
What is a mutual fund?
Before learning about how to invest in mutual funds, investors know what mutual funds are and how they work. A mutual fund is a pool of professionally managed funds where the fund manager actively manages the scheme’s investment risk by diversifying its portfolio across various asset classes and money market instruments. Suppose you invest in an equity fund, that fund will invest in stocks of companies spread across market capitalization depending on the investment objective and asset allocation of the scheme. Similarly, if you invest in a liquid fund, since this is a highly liquid debt scheme the fund manager will invest in securities that mature within 91 days.
How do mutual funds work?
Asset Management Companies and fund houses running different mutual fund schemes pool financial resources from investors sharing a common investment objective. This money is later invested as per the scheme’s investment objective and the benchmark it is trying to outperform. Investors are allotted mutual fund units as per the investment sum and depending on the current NAV. For example, if you invest Rs. 5000 in a mutual fund scheme whose NAV stands at 34, you will be allotted 147.05 units. The value of your units may go up or fall down depending on how the underlying securities of the mutual fund scheme react to changing market cycles.
One single mutual fund unit is an amalgamation of various stocks and securities. Investors get exposure to multiple high quality expensive stocks through small mutual fund investments. Mutual funds do not only offer diversification but also mitigate the overall investment risk.
How to invest in a mutual fund scheme?
A mutual fund house is mandated to do a background check of its customers ever since the Reserve Bank of India came up with the concept of KYC back in 2004. Know Your Customer (KYC) is a mandate which every mutual fund investor must comply with so that they can start investing in mutual funds. KYC is mandated to curb criminal activities like money laundering and financial fraud.
A KYC form requests the applicant to fill in all the basic details like their name, age, gender, address, etc. The applicant must duly fill the form and must submit the necessary documents like a photocopy or address proof and identity proof along with a passport size photograph. KYC registration can be done both online and offline. Once the AMC verifies all your KYC details and you a KYC compliant investor, you can then start investing in mutual funds.
What investment options do mutual fund investors have?
Investors can either invest through a mobile app made available by the AMC, their bank, or through a third party mutual fund aggregator. They can even invest by visiting the dedicated online investment portal made available by either of the entities.
There are two ways in which you can invest in mutual funds – either through a lump sum investment method or via a Systematic Investment Plan (SIP). Most investors choose the SIP route as it allows them to save and invest small, fixed sums at regular intervals. Investors with a long term investment horizon can consider SIP and can also gradually increase their investments to achieve their goals faster.
Mutual funds do not guarantee returns so please talk to your financial advisor before investing.