Mutual funds are very sophisticated products and for a first-time investor, feeling anxious is very common. However, you can easily start your investment journey by having a basic understanding of how mutual funds work.
How do mutual funds work?
Mutual funds are investment havens that group the savings of several investors under a particular scheme managed by an asset management company (AMC). The pooled money is invested in securities such as stocks, bonds according to the investment objective of the plan. The fund manager, appointed by the AMC, manages the investment portfolio according to market movements to create wealth for investors.
The fund house charges an annual fee called the investor’s share of expenses to manage its portfolio. Investors generally make money through regular dividends / interest and capital appreciation. They can choose to reinvest capital gains through a growth option or obtain regular income through the dividend option.
Why should I invest in mutual funds?
Investing in mutual funds is very convenient. With much less paperwork and market monitoring, you can expose yourself to a broad-based market and investment according to your requirements. In addition, the ease of switching between funds and the rebalancing of the portfolio helps maintain their returns in line with expectations.
B. Low initial investment
With a price as low as Rs 500, you can gain access to a diversified portfolio of mutual funds. In addition, you get the flexibility to invest through a lump sum or a systematic investment plan (SIP). Compared to a lump sum, a SIP is a good way to reduce the overall cost of the investment and enjoy the power of capitalization.
C. Tax savings
Section 80C provides tax deductions on certain financial instruments and the mutual fund is one of them. The Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for Indians in recent years, due to its higher yields and the shorter lock-in period of 3 years.
D. Professional fund management
In investing mutual funds, your money is managed by a professional fund manager who is supported by a team of researchers. He formulates the investment strategy to make the asset allocation. You get real-time access to the financial environment and adjust your mutual fund portfolio accordingly. They have the investment-related skills that retail investors may lack.
Things to consider as a first-time investor
A. Set an investment objective.
Defining your financial objective in terms of goal, budget and permanence can do a lot. This can help you decide how much you can set aside for a mutual fund and determine your appetite for risk. Investment always works better with a purpose.
B. Choose the right type of fund
It takes more than reading about the different types of mutual funds to decide on an appropriate category of mutual funds. Experts usually recommend a debt fund or a balanced balance for first-time investors, since it carries minimal risks and, at the same time, offers higher returns than, for example,
Our experts can help you choose the best mutual funds.
C. Make a short list and choose a mutual fund
With hundreds of mutual fund schemes within each category, you must select the one that has performed well consistently for at least 5 years. Do not forget other factors such as the credentials of the fund manager, the expense ratio, the portfolio components and the assets under management while you are at it.