There are 5 Simple Steps to Invest in Mutual Funds Online
- Understand your risk capacity and risk tolerance. This process of identifying the amount of risk you are capable of taking is referred to as risk profiling.
- The next step is asset allocation. Once you identify your risk profile, you should look to divide your money between various asset classes. Ideally your asset allocation should have a mix of both equity and debt instruments so as to balance out the risks.
- Then you should identify the funds that invest in each asset class. You can compare mutual funds based on investment objective and past performance.
- Decide on the mutual fund schemes you will be investing in and make the application online or offline.
- Diversification of your investments and follow-ups are important to ensure that you get the best out of your investment.
Types of Mutual Funds
Mutual funds types are broadly classified on the basis of – investment objective, structure, and nature of the schemes. When classified according to the investment objective, mutual funds can be of 7 types – equity or growth funds, fixed income funds or debt funds, tax saving funds, money market or liquid funds, balanced funds, gilt funds, and exchange-traded funds (ETFs).
Based on the structure, mutual funds can be of 2 types – close-ended and open-ended schemes. When mutual funds are classified on the basis of nature, they can be of 3 types – equity, debt, and balanced. There is an overlap in the classification of some schemes like equity growth funds which can fall under classification based on investment objective as well as classification based on nature.
We have explained some of the types of mutual funds, below:
Growth or Equity Schemes – These funds invest in equity shares and the investment objective is capital gains over medium or long-term. They are associated with high risks as they are linked to the highly volatile stock markets but over long term, they offer good returns. Hence, investors having a high appetite for risk find these schemes to be an ideal investment option. Growth funds can further be classified into diversified, sector, and index funds.
Debt Funds – Also known as fixed income funds, they invest in fixed income or debt securities such as debentures, corporate bonds, commercial papers, government securities, and various money market instruments. For those who seek a regular, steady, and risk-free income, debt funds can be an ideal choice. Gilt funds, liquid funds, short-term plans, income funds, and MIPs are the subcategories of debt funds.
Balanced Funds – These funds invest in a mix of debt instruments and equity shares. Investors can expect a regular income and growth at the same time with these funds. They offer a good investment option for investors who are ready to take moderate risks over medium or long-term.
Tax Saving Funds – Anyone looking to grow their capital while also saving tax can opt for tax saving schemes. Investors can enjoy tax rebates under Section 80C of the Income Tax Act, 1961 through tax saving funds, also known as equity-linked savings schemes.
Exchange-Traded Funds (ETFs) – An ETF trades in a stock exchange and owns a basket of assets such as bonds, gold bars, oil futures, foreign currency, etc. It offers the flexibility of purchasing and selling units on the stock exchanges throughout the day.
Open-ended schemes – In an open-ended scheme, units are bought and sold continuously and hence, allows investors to enter and exit according to their convenience. Purchase and sale of funds are done at the Net Asset Value (NAV).
Close-ended schemes – In this type of scheme, the unit capital is fixed and only a specific number of units can be sold. The units in a close-ended scheme cannot be bought by the investor after the New Fund Offer (NFO) has passed which means they cannot exit the scheme before the end of the term.
Costs associated with investing in Mutual Funds
The fund value is calculated as per the Net Asset Value (NAV), which is the value of the fund’s portfolio net of expenses. This is calculated after every business day by the AMC.
AMCs will charge you an administration fee, which covers their salaries, brokerage, advertising and other administrative expenses. This is usually measured using an expense ratio. The lower the expense ratio, the lower the cost of investing in that Mutual Fund.
AMCs may also charge loads, which are basically sales charges incurred by the company in the form of distribution costs.
If you are unfamiliar with associated charges, you might get into a position where the profits from your investment are reduced considerably due to overhead expenses. So, it’s a good habit to read the fine print for details on expenses and fees related to a Mutual Fund.
How to invest in Mutual Funds? step by step guide
Before you decide to invest in a mutual fund, it is important to keep the below points in mind. Doing so will help you choose the right kind of funds to invest in, and help you accumulate wealth over time.
Identify your purpose for investing –
This is the first step towards investing in a mutual fund. You need to define your investment goals which can be – buying a house, child’s education, wedding, retirement, etc. If you do not have a specific goal, you should at least have a clarity on how much wealth you wish to accumulate and in how much time. Identifying an investment objective helps the investor zero in on the investment options based on level of risk, payment method, lock-in period, etc.
Fulfill the Know Your Customer (KYC) requirements –
In order to invest in a mutual fund, investors need to comply with the KYC guidelines. For this, the investor needs to submit copies of Permanent Account Number (PAN) card, Proof of Residence, age proof, etc. as specified by the fund house.
Know about the schemes available –
The mutual fund market is flooded with options. There are schemes to suit almost every need of the investor. Before investing, make sure you have done your homework by exploring the market to understand the different types of schemes available. After you have done that, align it with your investment objective, your risk appetite, your affordability and see what suits you best. Seek the help of a financial advisor if you are not sure about which scheme to invest in. In the end, it is your money. You need to ensure that it is used to fetch maximum returns
Consider the risk factors –
Remember that investing in mutual funds comes with a set of risks. Schemes that offer high returns is often accompanied with high risks. If you have a high appetite for risk and wish to accomplish high returns, you can invest in equity schemes. On the other hand, if you do not want to risk your investment and are okay with moderate returns, you can go for debt schemes.
After you have identified your investment objectives, fulfilled the KYC requirements, and explored the various schemes, you can start investing in mutual funds. A bank account is also a mandate while making a mutual fund investment. Most mutual fund houses will ask for a physical or an online copy of a cancelled cheque leaf bearing the IFSC (Indian Financial System Code) and MICR (Magnetic Ink Character Recognition) of the bank.
Ways to invest in Mutual Funds
There are different ways in which mutual fund investments can be made. They are:
Offline investment directly with the fund house
You can invest in schemes of a mutual fund by visiting the nearest branch office of the fund house. Just ensure that you carry a copy of the below documents –
- Proof of Address
- Proof of Identity
- Cancelled Cheque Leaf
- Passport Size photograph
The fund house will provide you with an application form which you will need to fill and submit, along with the necessary documents.
Offline investment through a broker
A mutual fund broker or a distributor is someone who will help you through the entire process of investment. He will provide you with all the information you need to make your investment including the features of various schemes, documents needed, etc. He will also offer guidance on which schemes you should invest in. For this, he will charge you a fee which will be deducted from the total investment amount.
Online through the official website
Most fund houses these days offer the online facility of investing in mutual funds. All you need to do is follow the instructions provided on the official site of the fund house, fill the relevant information, and submit it. The KYC process can also be completed online (e-KYC) for which you will need to enter your Aadhar number and PAN. The information will be verified at the backend and once the verification is done, you can start investing. The online process of investing in mutual funds is easy, quick, and hassle-free and hence, is preferred by most investors.
Through an app
Many fund houses allow investors to make investments through an app which can be downloaded on your mobile device. The app will allow investors to invest in mutual fund schemes, buy or sell units, view account statements, and check other details concerning your folio. Some of the fund houses that allow investments through an app are SBI Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund, Aditya Birla SunLife Mutual Funds, and HDFC Mutual Funds. Some apps like myCAMS and Karvy allow investors to invest as well as access the details of all their investments from multiple fund houses, on one platform.