How can a beginner start a mutual fund?
If you want to grow your money to acheive your financial needs with long-term planning, then mutual funds are a great option to invest. In MF, many investors invest in a pool of various securities such as stocks, bonds, gold, etc. It is different and less risky than investment in the share market where one has to invest in individual stock. Mutual fund schemes are managed by professional fund managers who have expertise in the stock market.
But how do you start investing in mutual funds for the first time in India? Here are some simple steps to guide you:
a. Analyze your financial situation and risk capabilities:
Before making any time of investment you must know your financial situation i.e. income & expenses after investing you also have to fulfill your regular financial needs. But if you want to invest in mutual funds, you need to see both the financial situation and risk capabilities because mutual funds are linked with market risk. So, you have to be prepared for such market risk. Younger investors can take more risk due to less liability and they have more time to recover, than older investors.
So before investing check your financial health in terms of your income, expenses liabilities, etc. After accessing these determine what is your financial goal, how much you can invest, and for what duration you can invest.
Your financial situation is the state of your income, expenses, assets, liabilities, and savings. It determines how much money you can invest and for how much long time. You should have a clear idea of your monthly budget, emergency fund, debt obligations, and savings goals before you invest.
Also Read : What is collateral in Mutual fund?
b. Analyze the actual value of your goals and calculate with the investment risk:
After analyzing your financial situation and the investment risk now identify the objectives and goals for investment like a house, a child’s education, a vehicle, retirement planning, etc. Each goal is different in terms of money needed and time to achieve the goal.
Due to inflation and changing taxes, the real values of your goal will be different from today. Also, your income will increase. So, you need to Analyze the actual value of your goals. Also if you want to achieve your goal in the short term, accordingly you need to invest considering the Mutual fund market risks.
c. Select mutual funds that fit with your goals, financial situation, and investment risk :
After analyzing your financial situation and the investment risk, now you need to choose the right MF that suits your requirements. There are different types of MFs like equity funds, debt funds, hybrid funds, index funds, etc & each fund has its features & benefits that include risks and returns. Below are some factors to be considered before selecting the mutual funds (MF):-
I. Fund category: Mutual funds are classified based on their asset allocation and investment strategy. For example
- Large-cap equity funds: – Large-sized companies are more stable and well-established
- Liquid funds: Very short-term debt securities that are highly liquid and low-risk
- Balanced advantage funds: – Mix (equity and debt) securities that can vary dynamically as per market conditions.
II. Fund performance: Track the performance of the fund’s returns in the past with its benchmark index and some similar funds in the same category. Check how the fund has performed in different market conditions over a period of time.
III. Fund manager: A fund manager is a professional who manages & makes investment decisions for the fund. Check the fund manager’s experience, qualifications, and investment track record, and what the fund manager has managed in the past.
IV. Fund size: The total amount of money that is invested in the fund is called Fund size. Select funds that have an optimal size, neither too small nor too large. The fund that is too small funds may lack in diversification and liquidity, also too large funds can have performance and scalability issues.
V. Fund expenses: The fund company charges an amount to manage the fund is called Fund expenses. Select funds with less expenses but without compromising the fund managing quality. This can include
- The expense ratio (the annual fee charged as a percentage of assets under management),
- Exit load (the fee charged when you sell or switch units within a specified period).
- Transaction costs (the costs charges for buying or selling securities)
- Other charges.
d. Finalize investment amount (monthly SIP/Lumpsum) and starting date:
Once you have decided on the mutual fund depending on the above factors, decide whether you want to invest in lumpsum i.e. one-time investment in a fund, or SIP i.e. a systematic investment plan, where you can invest in a regular monthly or quarterly investment. In Mutual funds, there is a benefit from the power of compounding and this helps to grow your money.
e. Investing online or offline:
In the final step, you can invest in MF on both modes i.e. online or offline through various methods like.
Online
- Directly from the fund company website or app
- With the help of the broker’s website or app
- Via online aggregators or robot-advisors
Offline
- Directly from the fund company office or branch
- With the help of the broker’s office or branch
- With the help of AMFI registered agents or distributors
Apart from above you need to fill online or offline form by submitting documents like your identity proof, address proof, PAN card, bank details, etc to to complete your KYC (know your customer) verification. After that, you need to make payments through cheque, net banking, UPI, etc. After the investment, you need to monitor & review the fund performance regularly.
Conclusion:-
MF can be more beneficial in a long-term investment but reviewing is very necessary. But before investing check your financial situation and risk associated with mutual funds.
