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How to Invest in Mutual Funds

10 January 2022
6 minutes

What if you could invest your savings and have someone else manage it wisely and professionally on your behalf. Mutual Funds works the same way and are professionally managed investment vehicles that pool money from investors. Mutual fund investments may seem scary at first, especially for newbies. Once you are well-versed with how to buy mutual funds, there is no going back. In this article, we have covered all the nitty-gritties of mutual funds.

There are a few primary steps to start investing in mutual funds online: open an account, learn how to pick mutual funds, understand how mutual funds work and start investing!

Read on to find out more.

How to Start Investing in Mutual Funds Online?

Now that we have explained what are mutual funds and how it works, the next and the very important information is how to invest in mutual funds. Online Investments in mutual funds can be done in two ways, viz. Online through the official website or through an app. Let’s put some light on both the methods of investing:

  1. By creating an account on an official website (AMC Website)

Every asset management company has an official website where you can find multiple mutual funds in each category to invest. You just have to follow the instructions provided on the official site of the fund house, fill all the required information and submit it. The KYC process can also be completed online (e-KYC) for which only the Aadhar Number and PAN is needed. The information provided by you is verified at the backend and upon successful verification, you can start investing.

You can also wish to invest offline with the AMCs as most of them continue to provide this feature.

  1. Through an App

Asset Management Companies allow investors to invest in mutual funds through mobile applications in a quick and hassle-free way. The AMCs have their own mobile applications and there are also third party mutual fund aggregators who provide a platform to invest in mutual funds.

The app enables the investor to invest in mutual fund schemes, view account statements, buy or sell units and check other relevant details pertaining to your portfolio. Investors can get to invest in a plethora of funds offered by different fund houses.

Read more on Groww: Types of mutual funds

Costs of Investing in Mutual Funds

Expense ratio: The expense ratio is the percentage of average assets under management that go towards such expenses that Asset Management Companies (AMCs) incur.

AMCs incur expenses towards administration, fund management, distribution, etc in order to run their businesses.

One time charge/transaction charge: A nominal amount may have to be paid by investors as transaction fees. For investments below Rs.10,000, no transaction fee is levied. This may change depending on the AMC.

Exit load: Exit load is charged when an investor withdraws money in a short span of time. It is charged as a percentage of the prevailing Net Asset Value (NAV) of the scheme.

STT: When an investor decides to sell mutual fund units, a Securities Transaction Tax (STT) is levied.

STT for different schemes:
For close-ended schemes and ETFs: 0.001% of the traded value
Open-ended equity-oriented schemes: 0.25% of the traded value
Debt mutual fund units: No STT

Stamp duty: Stamp duty is applicable on the issuance and transfer of mutual funds irrespective whether units are held in demat or physical mode. Stamp Duty is a direct tax levied by the government.

Stamp duty in various cases:

Purchases, fresh instalments in existing SIPs and STPs, Switch-in, and Dividend reinvestment transactions: 0.005%.

Transfer of units from one demat to another plus the off-market transfers: 0.015%.

How Do Mutual Funds work?

An Asset Management Company (AMC) pools investments from various individuals with common investment objectives. This collective amount is then invested as per the investment objective of the fund. It could be invested in securities like stocks, bonds, money market instruments, commodities such as precious metals and other similar assets.

These funds are managed by financial experts called fund managers, who align with the specified investment objective of the fund and invest to create growth or appreciation of the amount for investors. The AMCs charge expense ratio which is nothing but the annual maintenance fee to manage the investments of individuals. The investors earn money with regular dividends/interest in capital gains. Furthermore, one can choose to reinvest the capital gains through a growth option or earn a regular income with the dividend option. In simple words, mutual funds are the diversification of the investment.

Points to Keep in Mind Before Investing in Mutual Funds

Once your account is set up and you have complete knowledge of all the costs associated, your next step in mutual fund investment is to pick the right fund. Here are a few points that will you to select a mutual fund.

What is the purpose of Investing?

This becomes the foundation of your investment; defining your investment goals can help you select the right fund accordingly. Be it buying a new house, car, wedding child’s education, retirement or any other, deciding the goal of the investment is a must. In a nutshell, one should have a bigger picture in their mind of how much wealth they wish to accumulate and in what duration.

Choose the right fund for you

Do your homework well as the market is brimmed with options and choosing the best fit for you might be a bit tricky task. Evaluate the fund you choose with your investment objective, risk appetite, your affordability. You can also get help from a financial advisor if you are facing difficulties in choosing the right one.

Consider the risk factors

One important thing to keep in mind comes with a certain set of risks. Schemes with high returns often come with higher risks. If you have a high-risk appetite and your investment objective is to accomplish high returns, you can go with equity schemes. On the other hand, if you don’t want an investment with high risk and moderate returns can fulfill your investment objective, then you can go for debt schemes.

Keep your KYC Documents Updated

One cannot invest in a mutual fund if he/she is not Know Your Customer (KYC) compliant. Investors need to comply with KYC guidelines in order to invest in mutual funds. To become KYC compliant, you need your PAN card and valid address proof.

Bottomline

Although there are a plethora of investment options out there in the market, mutual funds still prove to be one of the wonderful and convenient ways to invest your money. One of the key benefits is the professional management of your funds; the funds are managed by professional fund managers after thorough research of the markets. Not to mention, diversification of your portfolio is also one of the major benefits of investing in mutual funds.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww.

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Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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