Since mutual funds are the best investment tool for a beginner, it is imperative that the investors know a few basic things before they start investing.
The first and a very important step to successfully start investing in mutual funds is to be "KYC Compliant". For this, you will need to submit basic details like address proof, photographs, date of birth proof and PAN card to the fund house or to the mutual fund broker. KYC needs to be updated each time you change your address.
The investor then needs to determine his investment objectives - whether the investment is made with the objective of supporting his retirement, for a child's education, for current income, for growth, etc. Consideration also needs to be given to age, risk tolerance, investment horizon, etc. A careful analysis of these variables will help in deciding the fund as well as the expected return.
There are different types of funds, but they can be broadly classified into Debt Funds and Equity Funds. As a general rule, most investors invest a sum proportionate to their age in debt funds. Accordingly, if you are 25 years old, you can invest upto 75% in equity funds and 25% in debt funds. Similarly, if you are in your 50s or 60s, majority of your portfolio should comprise of debt funds. However, this rule is not sacrosanct.
A diversified or balanced fund, that is a fund comprising of both debt and equity instruments, is also a very good tool for beginners. They are inherently safer than investing in pure equities and act as a cushion when the market crashes, thus providing protection from risk to some extent.
You can also invest in funds depending on the type of return - Capital Appreciation or Dividend Oriented. While a dividend paying fund distributes the profit made among the investors thus causing the NAV to be rigid, the profits made by a mutual fund focused on capital appreciation are added back to the scheme.
Because an average investor may not have the time or the expertise to invest in mutual funds and track the market on a regular basis, selecting a good fund manager becomes paramount. The fund manager will be able to provide expert knowledge and active management of the portfolio, in exchange for management fee.
Despite the expertise of a fund manager, it is advisable to know a few basic terms before you start investing in mutual funds:
Having read this question, I assume that you very well understand the importance of investment, which includes some of the most important reasons like:
Coming to the query of how does you structure or give a kick-start to your investment decision. Key factors to consider (before you put your money in any scheme) include:
On the basis of these factors, your objective of investment will be clearer. Consider communicating with people who already invest, not only to learn the how-to of the process, but also learn from their mistakes, if any. This exercise will give you more insights into your profile and the type of investment you are willing to do.
Next step includes selection of the type of asset you want to invest in or your way of investment which considers:
After identification of investment approach, you should consider the ratio of investments for identified assets. For this, you can follow certain thumb rules like Warren Buffet’s thumb rules of investment which state:
What we mean by smart investment is: If you are a beginner in the world of investment, there are chances that choosing among multiple options of investment may seem challenging to you. To make your thought process easier, it has been observed and agreed by researchers that mutual fund is one of the most considered options for investors for it allows them to pool in their money for a diversified selection of securities. Diversification ensures that if one or two investments are not performing well at a point of time, investor is not in complete loss.
Returns from mutual funds are inflation-adjusted and are higher compared to other options and since every mutual fund is regulated by SEBI, investors remain assured that their money is in safe hands. Moreover, mutual funds are easy to buy and sell. Some of the top mutual funds include SBI Mutual Fund, ICICI Prudential, HDFC Mutual Fund. etc.
If you are a novice looking to invest in equity funds, never stop yourself from seeking advice from consultants and immediate trustworthy advisors.
We hope this answers your question!