How To Invest In A Mutual Fund For Beginners?

Mutual Funds are attractive investments for citizens who want to grow savings over the long-term. Mutual Funds are flexible and can be availed for amounts as low as Rs 500. They can be held for a long time or a shorter period. Mutual Funds are not risk free and have a measure of risk depending on the type.

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How To Invest In A Mutual Fund For Beginners ?

New investors mistake Mutual Funds to be a single product. But, Mutual Funds are of various types like equity, debt and hybrid funds. Mutual fund classification is done based on the investment horizon, asset classes and tax treatment.

This diversification often overwhelms investors. Mutual Funds look complicated, but are certainly not difficult to understand. Following are some mutual fund tips for beginners:

1. Understand the risks:

Before investing in mutual funds, it is important to understand the risks involved. Mutual Funds carry risk from the underlying securities and investment methodology.

• Equity funds (mid and small cap) carry the highest risk and offer higher rewards.
• Debt funds carry low risk and offer lesser returns.
• Hybrid funds are those which invest in both debt and equity. They balance risk and return.

Evaluate risk profile and invest in those mutual funds which best meet expected returns and risk tolerance.

2. Define investment objectives:

After evaluating your risk tolerance, define investment objectives. Ask yourself ‘how much can you invest’ and ‘how long can you stay invested’. The minimum amount that can be invested in Mutual funds is as low as Rs 500 a month. Apart from ELSS and closed ended mutual funds, you can freely decide when to invest and redeem mutual fund units.

ELSS is a great option for long-term investment and saving income tax. A liquid fund or an ultra short-term debt fund are great, if you want to invest for short-term, maintain a high level of liquidity and receive higher returns. Therefore, depending on your investment objective, choose that scheme which compliments investment objectives.

3. NAV does not determine growth:

Never invest in a mutual fund based on the Net Asset Value (NAV). NAV is not an indicator of the performance of mutual funds. The growth of Mutual Funds is represented by percentages.

Let’s say you bought 100 units of a fund with NAV Rs 10 vs 10 units of a fund with NAV Rs 100. In both cases, you are investing Rs 1,000. Say both schemes give 10% growth. You will earn Rs 100 on both the investments of Rs 1,000.

4. Diversify your investments:

Mutual funds have great scope for diversification. You have variety of options for diversification based on the types of investments. In a bullish scenario, you can invest significantly in small or mid-cap funds which offer a high rate of return. In a bearish scenario, you can invest largely in liquid or ultra short-term debt funds which have lower risk, offer lower returns with a higher level of consistency. You can also invest with a mix of equity funds and debt funds to balance the overall risk and return on your portfolio.

5. Focus on long-term growth:

To earn good returns on Mutual Funds, you have to stay invested for the long-term. In the short-term, equity markets are often volatile but in the long-term, they head up. Therefore, focus on investing in equity-oriented mutual funds for 5 years or more to earn good returns.

6. Ideal strategy:

The ideal strategy of investing in Mutual Funds is to maintain short-term investment (debt) along with long-term investments (equity). Investing in debt funds ensures liquidity and equity funds ensure capital appreciation.

7. Monitor your portfolio:

Investments need to be monitored. Monitoring your investment portfolio periodically, helps examine performance. You can figure out which investment is working and which is not. With this information, you can consider reallocation of non-performing investments into other options and give a fresh start to your investment portfolio.

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Regulation of mutual funds:

In India:

• Mutual Funds are regulated by the Securities and Exchange Board of India (SEBI), Reserve Bank of India, Companies Act, Stock Exchange Act, Indian Trust Act and Ministry of Finance.
• In 1996, SEBI formulated Mutual Fund Regulation. RBI regulates bank-sponsored mutual funds, especially those offering guaranteed returns.
• Mutual Funds need to get approval from RBI in order to provide a guaranteed returns scheme.
• Ministry of Finance supervises RBI, SEBI and appellate authority under SEBI regulations.
• Mutual funds can appeal against SEBI rulings to the Ministry of Finance.

SEBI regulations for mutual funds:

In India:

• The Asset Management Company (AMC) of Mutual Funds must have 50% independent directors.
• A separate board of trustees with a minimum of 50% independent trustees and custodians.
• Funds are to be managed by AMCs.
• The custody of assets is with trustees.
• Mutual funds must maintain a minimum of Rs 50 Crores for an open-ended scheme and Rs 20 Crore for the closed-ended scheme to meet liquidity concerns.
• Mutual funds must invest money raised from saving schemes within nine months.
• To meet short-term liquidity requirements, they can invest a maximum of 25% in money market instruments in the first six months and a maximum of 15% after six months.
• SEBI checks for compliance by inspecting mutual funds each year.

While granting the Sponsor permission:

• SEBI looks into the Sponsor’s track record, integrity in business transactions and financial soundness.
• Examines the schemes.
• Requires Mutual Funds to adhere to a code of advertisement and conduct.

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