How to Start investing in Mutual Funds: A Detailed Guide

Investments are the ideal way to generate capital for both the near and far future. There are some things you can do to multiply your savings instead of parking them in a bank account. Mutual Funds, for instance, are a viable option offering flexibility and good returns. Their ease of investing and the variety of options available have made mutual funds a widely pursued investment option.

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However, it is important to acquire basic knowledge about mutual funds and their functioning before starting. This post gives a detailed account of the factors you should consider while making your investment and choosing schemes available in the market.

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Calculate Risk

It is imperative to note that India’s investment landscape offers several mutual fund schemes that vary as per the investors’ risk appetite. A new investor should carefully consider the amount of risk they are willing to take. A calculated comparative study of the risk factor in multiple schemes vis-à-vis your risk capacity will help you make an informed decision. Equities, for instance, can be subject to heavy volatility. An investment in equity funds should be made accordingly.

Age Factor

It is always advisable to take account of your age and retirement time while investing. As you approach your retirement time, you may want to limit your equity funds investments to reduce risk.

Types of Mutual Funds

When you invest in a mutual fund, your funds are parked in multiple investment instruments. The value of your investment increases with the increasing prices of these instruments.

There are several categories of mutual funds that you can explore to make the right pick. Some of the more popular ones are:

  • Balanced Funds: As the name suggests, balanced mutual funds are a combination of equity and debt funds. While equities provide high returns, debt funds offer security to cancel the volatility of equity prices. Equity-oriented balanced funds give more weight to equity instruments.
  • Large-Cap Funds: Large mutual fund includes a diversified portfolio of companies with large market capitalization. Stocks belonging to large-cap companies are less volatile and offer considerable security for first-time investors. They also provide tax-free returns.
  • Index Funds: An index fund’s portfolio mirrors the stocks in the same proportion as that of the index it follows. A potential advantage is that there is no fund manager (and its associated risks) involved. They are large-caps funds with low volatility because they track the Sensex and the Nifty.
  • Tax-Saving Funds: Equity-Linked Savings Schemes (ELSS) are a popular option amongst retail investors due to the tax benefits they offer under Section 80C of the Income Tax Act. Their lock-in period of three years ensures high returns with low overall volatility, making them a suitable choice for beginners.
  • Monthly Income Plans: If you are approaching your retirement and looking to initiate investments to create some corpus, MIPs may be an option worth looking at. They are hybrid mutual funds with most of their holdings in debt funds instead of a majority of equity holdings in balanced funds. They offer both long and short-term benefits and are considered ideal for aged investors.

Tax Requirements

First-time investors should have an understanding of the tax liabilities associated with mutual funds to strategize their investments. The dividends generated under Dividend Mutual Funds are subject to a 10% tax. There is a capital gains tax applied to the returns created in growth funds. A 15% tax is liable if you sell your equities within the one-year period (called the short-term capital gains tax), while a 10% tax is liable if you sell your equities after one year (called the long-term capital gains tax).

Novice investors should seek professional assistance related to the analysis of mutual fund schemes. A complete picture of your financial goals, investment horizon, risk capacity, and savings amount will help you make the right choice. There are many top fund houses – such as HDFC Mutual Funds, SBI Mutual Funds, Birla Sunlife, and more, who’s schemes you can look at.

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