Mutual funds are investments which pool savings from a number of investors under a particular scheme managed by an asset management company (AMC). The pooled money from Mutual Funds is then invested in securities like equity shares, bonds according to the scheme.
The fund manager manages the investment portfolio as per the market situations in order to create wealth for investors. The company charges an annual fee called expense ratio from the investors to manage their portfolio.
The Mutual Fund investors usually make money by way of regular dividends/interest and capital appreciation. The investor can even decide whether to reinvest the capital gains via a growth option or earn regular income by way of dividend option.
Advantages of Mutual Funds Investment
Investing in mutual funds is very convenient. With a lot less paper-work and market-monitoring, you can get exposure to a broad-based market and investment as per your requirement.
Low initial investment
You can start a Mutual Fund Investment from as low as Rs. 500. As compared to a lump sum, an SIP is a good way to lower the overall cost of investment and enjoy the power of compounding.
Mutual funds under Section 80C provides tax exemptions. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for Indians in the last few years, owing to its higher returns and the shortest lock-in period of 3 years.
Professional fund management
In mutual fund investing, your money is always managed by a professional fund manager. This fund manager keeps a real-time eye on the financial environment and adjusts your mutual fund’s portfolio accordingly in order to maximize your profit.
Things for Beginners to do before investing in Mutual funds
Fix an investment goal
Define your financial goal in terms of objective, budget, and tenure so that you can go a long way. Always decide how much you can set aside for a mutual fund and figure out your risk appetite. Investment always works best with a purpose.
Choose the right fund type
It is always recommended to invest in a balanced or debt fund for first-time investors as it comes with minimal risks while giving you higher returns.
Diversify your portfolio
Consider investing in at least three mutual funds. It will even out risks – when one fund underperforms, the other makes up for it without bringing down your entire portfolio.
Go for SIPs
Systematic Investment Plan (SIP) is good to start with for beginners if investing in equity or equity-oriented funds. While a lump sum investment can be very risky, a SIP allows you to spread your investments over time and invest at different market levels.
Keep KYC documents updated
Know Your Customer (KYC) is a must if you want to invest in Mutual Funds. It is a government regulation for most financial transactions in India.
Seek advice from a mutual fund expert
The entire process of investing in mutual funds can be confusing and overwhelming. Plus, there are thousands of mutual funds to choose from and once bought, the mutual fund’s performance has to be periodically monitored. In such situations, do get the services of a mutual fund expert.