Beginner’s Manual to Investing in Mutual Funds
Mutual funds are a wonderful investment vehicle for beginners because of their diversification, professional handling, and easy access. Listed below is the step-by-step manual to
commence mutual fund investment:
1. Know What a Mutual Fund is
A mutual fund collects funds from several individuals to invest across a range of assets such as stocks, bonds, and others.
Professionally managed fund managers provide investment decisions, decreasing the demand for individual market know-how.
2. Define Your Investment Aims
Specify your financial aims, i.e., building wealth, retirement investment, or paying for education.
Your objectives will identify the most suitable mutual fund that can address your needs.
3. Understand the Types of Mutual Funds
Equity Funds: Invest largely in shares for long-term capital growth.
Debt Funds: Invest in bonds and fixed income instruments for guaranteed returns.
Hybrid Funds: Blend equities and debt securities to strike a balance between risk and reward.
Index Funds: Follow market indices, providing low-cost passive investment choices.
4. Test Your Risk Tolerance
Equity funds are riskier but have greater returns.
Debt funds are safer but might deliver lesser growth.
Select funds as per your comfort and time horizon.
5. Compare and Research Funds
Analyse mutual funds on the basis of:
Past Performance: Examine past returns.
Expense Ratio: Smaller fees imply greater long-term returns.
Fund Manager’s Track Record: Successful managers ensure performance improvement.
Assets Under Management (AUM): Higher AUM funds can imply investor confidence.
6. Select the Suitable Investment Platform
Invest through:
Direct mutual fund platforms (such as Coin by Zerodha, Groww).
Asset management companies (AMCs) directly.
Financial planners for tailored advice.
7. Select SIP or Lump Sum Investment
Systematic Investment Plan (SIP): Invest a small, fixed sum at regular intervals to lower market risk.
Lump Sum Investment: For high-risk tolerance and big-ticket investors.
8. Watch Over Your Investments
Periodically track fund performance to confirm if they are meeting your objectives.
Rebalance your portfolio if necessary to adhere to desired asset composition.
9. Know Tax Consequences
Equity funds invested for a period exceeding one year are eligible for long-term capital gain tax (LTCG) at 10% over ₹1 lakh.
Debt funds invested for more than three years attract LTCG at 20% with indexation advantage.
10. Remain Consistent and Patient
Mutual funds are best suited for long-term wealth generation.
Hold on to your investment strategy and do not respond emotionally to short-term market movements.