What are mutual funds and how to invest in them?

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In simple terms, a mutual fund is a pool of money collected from investors with the same investment goals and managed by professional fund managers. A mutual fund typically invests the capital in equities, bonds, securities, and money market instruments. 

The returns generated on the mutual funds are dependent on their market performance. 

Subsequently, the gains are distributed to those who invested in proportion to their investment but after deducting the applicable expenses and figuring out its Net Asset Value or NAV. The NAV is essentially the combined market value of a mutual fund, rather than its bonds, securities, and shares components, on a particular day. Ideally, NAV per mutual fund unit represents the prevailing market units of all mutual funds, net expenses, and liabilities in addition to income earned, divided by outstanding units in the fund scheme. 

Who can invest in mutual funds?

mutual funds

Anybody can invest in a mutual fund. However, experts state that mutual funds are suitable for those with limited sums for investments or those who do not necessarily have time to track market changes and trends but wish to generate wealth. The money pooled in mutual funds is essentially invested by fund managers. In return, the mutual fund house charges a small fee, which is deducted from the final investment. Notably, the fees are regulated and subject to SEBI guidelines. These funds offer multiple choices to invest across different options. 

Investment goals tend to vary among investors and can be anything from building a retirement corpus to mobilizing funds for a kid’s higher education or purchasing a dream house. Similarly, the investment products required to receive the goals also vary. Fortunately, the Indian mutual fund space offers diverse schemes that cater to the unique needs of investors. 

Ways to invest in mutual funds

mutual funds

Individuals can invest in mutual funds in these ways –

  • By submitting a duly filled application along with a bank draft or cheque to designated Investors Service Centres of mutual funds, branch officers, or Registrar & Transfer Agents.
  • By investing online via the official websites of respective funds.
  • Individuals could invest through the help of a trusted financial intermediary or mutual fund distributor who’s registered with AMFI. 
  • Individuals can invest directly without necessarily routing the investment capital through any distributor.
  • They can invest online or through a paper-based mode.
  • Individuals can buy units of mutual funds through BSE and NSE like a company stock. However, to do so, they need to complete a one-time registration with BSE or NSE.

Individuals must note that a fund distributor could be a non-individual like a bank, online distribution channel, brokering house, or an individual. In addition, SEBI mandates that all mutual fund distributors must meet two requirements before they sell or distribute mutual fund schemes. For instance, they must obtain recognized certification from the National Institute of Securities Management. Plus, they must register with the  Association of Mutual Funds in India (AMFI ) and avail of the  AMFI Registration Number (ARN). The mutual fund distributors also need to obtain an NISM certificate, register with the Association of Mutual Funds in India, and get the Employee Unique Identification Number(EUIN) before they sell or distribute mutual fund schemes.

What is the KYC Requirement for Mutual Fund Investments?

mutual funds

Before investing in mutual funds either online or via paper-based mode, individuals must complete the KYC process. To begin, they need to fill out the prescribed KYC form. KYC is essentially a Customer Identification Process, which is followed when opening an account with a financial entity. KYC compliance has been made mandatory under the Prevention of Money Laundering Act and related rules. Typically, KYC establishes an investor’s identity and address through documents such as photo ID, PAN card, passport, address proof, and Aadhaar. 

What to do before investing in mutual funds?

Mutual funds are considered to be a profitable avenue for retail investors to generate substantial returns and benefit from favorable capital market uptrends. Investing in mutual funds is beneficial for building a corpus. However, the task of selecting the right kind of mutual funds that can help appreciate your wealth is challenging.

This is because one type of mutual fund may not be suitable for all. To elaborate, an equity mutual fund is considered to carry a high risk-reward quotient that makes it suitable for individuals who wish to generate high returns in their investments and do not mind exposing their portfolio to market volatility as they have a strong risk-taking capacity or low financial responsibilities.

However, the same scheme may not be suitable for retired individuals or those with low risk-taking capacity. Instead, these individuals with low risk-taking capacity might be better off with a debt fund, which comprises low-risk investment instruments such as bonds, securities, etc., with steady income promise, or they may consider parking money in other financial instruments, including – fixed deposits, endowment plans, etc.

To ensure one picks the most suitable mutual fund for their portfolio, individuals should first identify their risk-taking capacity and financial standing. This will allow them to understand the extent of risk they are living to take and how much of the same they can actually weather without hampering their saved corpus.

Subsequently, they should find which mutual funds are suitable for their risk and reward objectives and how they perform under different market conditions. This is why it is vital to conduct thorough research to understand the market undercurrents and analyze the market potential of different mutual funds in different situations. Individuals should also factor in their investment horizon, which is the period for which they wish to stay invested in the fund to achieve their long-term or short-term goals. However, individuals must note that to amplify savings and to earn higher returns on investments it is best to diversify one’s investment portfolio across different asset classes and categories of mutual funds.

Diversifying the investment portfolio will help spread out the risk involved and generate steady returns through the years that beat the inflation level. Keeping these in mind, individuals can plan their mutual fund investments to meet their designated financial goals.

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