How to invest in mutual funds: A guide

Mutual funds are a great way to build wealth over the long term, whether you’re an experienced investor looking to diversify your holdings or a new investor eager to get started. Mutual funds are a safe way to invest as they are professionally managed and hold a wide range of assets. Let’s understand how to invest in mutual funds.

Five easy steps on how to invest in mutual funds

Anyone who wants to know how to invest in mutual funds can do so by following these five simple steps:

Step 1: Get to know your risk level and ability by conducting risk analysis. Before engaging in mutual funds, it’s essential to understand how much risk you are willing to take.

Step 2: Once you’re done with risk profiling, you need to allot your money between different types of assets. This is called asset allocation. A mix of stock and debt should be used in asset allocation to keep the risk levels in check.

Step 3: Find funds that invest in each asset type. This is the third step. Then, to compare mutual funds, you can assess how they’ve performed in the past.

Step 4: Choose the mutual fund plan you want to invest in.

Step 5: To get better results and make more money, you need to spread out your investments and check on them often.

How to invest in mutual funds online?

How can I invest in mutual fund? An investment pool that a fund manager runs is called a mutual fund. It’s basically the money that a lot of people put in together. Find out how to invest in mutual funds or how to start putting money into mutual funds by reading this blog post. If you are wondering how to invest in mutual funds online, you can follow one of the following methods.

By creating an account on an official website (AMC website)

Visit the asset management company’s (AMC) website to invest in a wide range of mutual funds. You have to follow the steps mentioned in the fund house’s website to fill out all the required information. With your PAN and Aadhaar, you can do the KYC process online. The information you submit will be checked in the backend. Once your KYC is done, you can start investing.

Through an app

AMCs make it easy and quick for people to invest in mutual funds through mobile apps. A way to invest in mutual funds can be found through mobile apps and third-party mutual fund providers. It is possible to invest in mutual funds, buy or sell units, see account records, and check other important stock information through the app. There are also a number of funds offered by different fund houses that can be invested in. Several AMCs let you invest in mutual funds through apps.

Types of mutual funds

Once you have understood how to invest in mutual funds, you should know their types. Mutual funds can be broken down into several types: Equity mutual funds, debt mutual funds, index funds, hybrid funds, money market funds, and fund of funds. Each type has its risks, benefits, and features.

How do mutual funds work?

When you invest in a mutual fund, your money grows as the fund’s holdings earn money or increase in value. The growth is impacted by things like how well the stocks owned do, how the market changes, and the investment choices made by the fund manager.

Costs of investing in mutual funds

Investing in mutual funds costs money. For instance, some costs are incurred when an owner buys, sells, or redeems an investment. Regular fund running costs include investment advice fees, marketing and distribution expenses, trading fees, and fees for safekeeping, transfer agencies, lawyers, and accountants. These costs aren’t always linked to a specific client transaction. However, mutual funds charge only fund management fees from investors, which is a small percentage of the money invested.

Expense ratio

The expense ratio shows how much the mutual fund company charges to run the fund. It is calculated as a share of the total funds that are being managed. 

One-time charge/Transaction charge

For purchases worth Rs. 10,000 or more, there may be a processing fee of Rs 100 to Rs. 150. In the same way, this fee is paid for SIP purchases worth more than Rs. 10,000.

Exit Load

Mutual funds charge a fee called an exit load when owners take their money out before a specific date, which is called the exit load. If you cash out your investment within the first year, this fee, which is usually around 1%, is due.

STT

Capital gains tax and the dividend tax are not the same thing as the Securities Transaction Tax. An STT of 0.001% is applied when you buy or sell mutual fund units of an equity fund.

STT for Different Schemes

This tax is 0.001% of the price of the unit being sold, and the seller must pay it. Transactions involving buying, selling, and redeeming units in mutual funds that are not equity-oriented are not subject to STT.

Stamp Duty

There is a 0.005% stamp duty on mutual funds that an owner pays when he buys units in a mutual fund and transfers to his demat account. The rate is 0.015% when units of a fund are moved between two demat accounts.

Stamp Duty in various cases

You will have to pay stamp duty on units of mutual funds when you buy them, make SIP installments, switch-ins, STP switch-ins, reinvest dividends, transfer or sweep dividends. The rate that would apply is 0.005%.

Points to keep in mind before investing in mutual funds

Based on the rules set by the Securities and Exchange Board of India (SEBI), mutual funds have been classified into different groups. SEBI rules say that all fund houses, also known as Asset Management Companies (AMCs), should offer all types of mutual fund plans. It will be good if you have a clear idea about why you are investing in mutual funds. 

Goal of investing

Know what you want from your investments, and decide whether you want growth or value. You should make a list of your goals like saving for retirement, pay for your children’s college or wedding, having an emergency fund, or building a corpus for meeting medical expenses.

Choose the right fund for yourself

It’s important what kind of fund you pick. It’s not always a good idea to base your choices on assumptions. Most importantly, you need to know about the different kinds of mutual funds in order to choose the ones that are best for your investment account.

Consider the risk factors

Evaluate the risks that come with the fund once you have understood how to invest in mutual funds. Find out what kinds of assets, industries, and stocks the fund is exposed to. Depending on the type of fund, think about things like credit risk, interest rate risk, and market risk.

Keep your KYC documents updated

People who invested before Aadhaar became widely used must now add their 12-digit Aadhaar number to their Know Your Customer (KYC) information. Investors will not be able to buy new mutual fund units if this information is not kept up to date.

Conclusion

It is easy to invest in mutual fund schemes for people who want to diversify their investments. Some of the best things about mutual funds are that you can invest in diverse investments that are appropriately managed and you can pick from funds that are designed to fit your goals and risk tolerance.

There are different categories of mutual funds. Each has its own investing goal and plan. Choose your pick after thorough research.

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