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Investing In Mutual Funds? Here Are The 10 Tips To Remember

19 April 2022

10 Tips to Invest in Mutual Funds

Mutual Funds in India are considered to be one of the most popular tools of investment. These investments funds are a collection of stocks, bonds, money market instruments, and assets.

Their popularity can be accredited to the several benefits that come along with such investments. For example, the feature of diversification, assistance of professional fund managers, and the opportunity to customise fund portfolios as per requirement make them appealing to the investors.

Mutual Funds in India further enable individuals who have limited cash to invest in the market. Cost-effective Mutual Fund schemes like SIPs, allow individuals to invest with as little as Rs. 100 or Rs. 500 to generate better earnings.

American business magnate and investor, Warren Buffet once stated, “Risk comes from not knowing what you are doing.”

His words stand true when it comes to the investment market as well. When individuals are aware of what goes on in an investment market and know the essential tips and tricks of the same, they are bound to excel as investors. With knowledge comes a better understanding of the market, which directly reduces their fear of impending risks.

On a similar note, individuals who are planning to put their money in Mutual Funds investment plans should learn about it as much as possible, right from the beginning. 

Besides sharpening their knowledge about the investment tool, they should make an effort to pick up some Mutual Fund investment tips to make the most of their investment venture. 

Here is a list of 10 such Mutual Fund tips for beginners that will help them in their investment venture-

  • Learn about the benefits of Mutual Funds in detail

The new generation of investors follow the motto – making your idle money work for you, but only a few of them know the best way for it.

Most individuals are aware of the perks that come along with investing in the stock market. But more than often they have no idea that routing such investments through Mutual Funds investment plans would prove more effective and beneficial for them.

When individuals invest through Mutual Funds in India, they directly avail the following benefits –

  • Unlike direct investments in stocks, it takes lesser time to learn about a Mutual Fund scheme and to weigh its features owing to its comprehensiveness. 
  • Mutual Funds in India are managed by professionals who are thorough when it comes to the nitty-gritty of the investment market. 
  • A Mutual Fund scheme offers investors a diversified portfolio and further helps them reduce the risk that comes along with investments in just one asset category.
  • Learn about the types of Mutual Funds

Mutual Funds are organised into categories by asset class, like stocks, bonds, and cash, and then further categorised based on their style, objective, or strategy.

Investors can select an ideal type of Mutual Funds for asset allocation and diversification of their portfolio based on their categories.

In a broader sense, there are three major types of Mutual Funds in India –

  1. Equity Mutual Funds: These investment schemes are high on both risks and potential rewards. Investors are often cautioned to consider their risk-appetite before investing in any equity-oriented Mutual Funds. 

These are the popular types of equity Mutual Funds –

  1. Large-cap funds
  2. Mid-cap funds
  3. Small-cap funds
  4. Sector funds
  5. Arbitrage fund
  • Debt Mutual Funds: These fund schemes mostly invest in debt instruments like government bonds, corporate bonds, etc. investment options. They are considered to be suitable for those individuals who are risk-averse but want to earn returns that are better than that offered by a bank.

These are the popular types of Debt Mutual Funds in India

  1. Gilt funds
  2. Income funds
  3. Monthly Income Plans (MIPS)
  4. Short-term funds
  5. Liquid funds
  6. Fixed maturity plans
  • Balanced Mutual Funds: Also known as Hybrid funds, these types of investment schemes put money into both stocks and bonds. They are diversified in nature and tend to have a balanced blend of both risk and reward in terms of investments.

The Hybrid funds are further divided into two types –

  1. Equity-oriented balanced funds
  2. Debt-oriented balanced funds
  • Learn about the associated risks

Investors should remember that no investment scheme is entirely risk-free. Even though the risk factor remains constant in Mutual Funds, the numerous available options help investors find one that matches their risk appetite and return expectations. 

The table below highlights the major risks that are associated with Mutual Funds investment plans –

Type of Risk


Type of Mutual Fund Associated Risk
Market risk All types The value of its investments declines because of unavoidable risks that affect the entire market.
Liquidity risk All types The risk of lack of market to sell funds, when investors want to exit.
Credit risk Debt Mutual Fund The risk of default by the fund house or borrower. They are supposed to invest in a debt fund that is rated high on investment grade by credit rating agencies. But sometimes fund houses invest in lower-priced debt papers than the safest paper in the market.
Interest Rate risk Debt Mutual Fund The risk due to change in interest rate, where your fund manager takes the wrong call on interest rates.
Country risk All types The value of foreign investments decline because of political changes or instability in the country where the investment was issued.


  • Know about your risk-appetite

When we say, ‘risk appetite’, we mean to talk about your ability to undertake risks in the investment market. It is more like the measure of how much mask risk an investor can handle. In Mutual Funds investment plans, schemes with higher returns are mostly higher in risks as well.

On the basis of risk, Mutual Funds in India can be categorised as –

  1. High-risk funds.
  2. Low-risk funds.
  3. Moderate risk funds.

Investors should adopt a sound risk management strategy and put it into practice while choosing a Mutual Fund to invest in.

  • Allocate assets properly

Well-planned asset allocation helps investors maximise their returns on investments and minimise their investment-related risks.

The trick to ensuring that assets are allocated properly, investors should incorporate a balanced mix of stocks, bonds, and related assets into their portfolio. But such incorporations should be made after taking into consideration their time horizon and risk capacity.

  • Learn how to pick the best types of Mutual Funds 

Investors are often spoilt for choices when it comes to Mutual Funds. Instead of being swayed by the attractive features and benefits of different Mutual Fund schemes, investors should focus their attention on their own financial goals. By doing so, they will be able to figure out if a said investment scheme and its features are beneficial for them or not. 

Any investor should consider the following parameters to essentially pick the best types of Mutual Funds suitable for his/her financial plans

  • Performance record.
  • Age of Mutual Fund.
  • Associated risks.
  • Expense ratio.
  • The Asset Management Company (AMC.)
  • Quality of the fund manager.
  • Asset Under Management (AUM.)

If these methods seem to be too overwhelming, any investor can simply check the rating of a Mutual Fund to gain some insight about its merit. But, worth mentioning, it would be unwise to base the judgement entirely on such rating systems. They should make some efforts to research at least the basics of different Mutual Funds investment plans.

  • Learn more about taxation and related benefits

Investors should learn as much as possible when it comes to the taxes applicable to their choice of Mutual Funds and the exemptions they can avail of on them. Such knowledge will prove to be handy to reduce the burden of tax-related expenses to a considerable extent.

Two types of taxes are applicable to Mutual Funds –

  • Tax on capital gain: The profits earned through the sale or redemption of mutual units are termed as capital gains. Depending on the holding period, the gain can either be a Short-term Capital Gain or Long-term Capital Gain. Such gains are subjected to taxation, known as Capital Gain Tax. 

The holding period for each fund is highlighted below –

Type Short-term holding Long-term holding
Equity funds Less than 12 months 12 months and more
Balanced funds Less than 12 months 12 months and more
Debt funds Less than 36 months 36 months and more

The table below highlights capital gain taxation on basic types of Mutual Funds-

Type  Short-term capital gains tax Long-term capital gains tax
Equity Mutual Funds 15% 10% without indexation
Balanced Mutual Funds 15% 10% without indexation
Debt Mutual Funds As per income tax slab 20% after indexation


  • Tax on Dividends: The dividends earned on Mutual Funds in India are subjected to Dividend Distribution Tax (DDT). The said tax is imposed by the Government on companies on the basis of the dividend paid to a company’s investors.

In the case of non-equity funds, DDT inclusive of surcharge and cess is levied at the rate of 28.84%.

Earlier there was no tax on dividends from equity-oriented Mutual Funds. But in Union Budget 2018, the Finance Minister proposed to introduce DDT on equity Mutual Funds at the rate of 10%, to provide a level field across growth-oriented and dividend distributing schemes.

  1. Equity-linked Saving Scheme (ELSS): This scheme enables investors to save tax. It also provides an opportunity for long term capital appreciation. Amongst all the tax savings schemes, this is the only one that gives the proper feel of pure equity. Even though ELSS has some risk involved, with a minimum lock-in period, it has emerged as the most attractive tax-saving vehicle today.
  • Learn to practice and rebalance your fund frequently

This is one of the most important tips to invest in Mutual Funds. Monitoring the performance of one’s investments and rebalancing their portfolio frequently proves helpful for investors. It offers them an idea if their investment is earning sufficient returns and if their portfolio is competent enough to cushion risk and make better returns. Investors may want to seek professional help to rebalance their portfolios in a better way.

  • Be alert about the latest financial trends and updates

An investment market is a volatile place; which means the market is a buzzing hub of new investments trends and policies. This makes it important for investors always to be alert about its happenings.

Investors who are in sync with the latest news and updates of the market are better equipped to make sound adjustments to their Mutual Fund portfolio.

  • Always remember the three-pointers of Mutual Funds

Investors should not base their choice of decision entirely on the scope of returns. They should look for other vital factors as well. Pointers like –

  1. A feasible investment horizon.
  2. Investor’s financial standing.
  3. Review of the investment portfolio.

– are deemed critical for generating a profitable return of investment in Mutual Funds that helps meet financial goals with ease.

Next time while looking for the answer to, “How to Invest in Mutual Funds?” investors should take into account these tips that are ultimate Mutual Fund investment advice for beginners. By doing so, they will be able to build their portfolios and maintain them without much hassle.

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