Investments are the ideal way to generate capital for the near and far future. You can do some things 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.
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.
Purpose of Investment
The foremost step before investing in mutual funds is to consider the goals you wish to fulfill. Deciding the purpose of your investment is critical to determining its time frame, the type of fund, and the principal amount. For instance, if you invest in your children’s education, the investment will have a long-term perspective. You could consider signing up for an HDFC Mutual Fund online if you want long-term goals.
There are two variants of mutual fund schemes offered: Dividend and Growth. If your investment is aimed at short-term goals, you should opt for dividend funds – which pay their investors a dividend at periodic intervals. Long-term objectives require a larger corpus of funds, which is possible via the reinvestment of your returns in growth funds.
Documentation
The next important step is to ready your documents. Finish your KYC compliance requirements to be able to invest. The KYC registration process requires your birth certificate, address proof, and PAN card. If you have an Aadhar Card, you can get an e-KYC without any paperwork.
Calculate Risk
It is imperative to note that India’s investment landscape offers several mutual fund schemes that vary per the investors’ risk appetite. New investors 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 consider 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. 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 the index it follows. They are large-caps funds with low volatility because they track the Sensex and the Nifty. A potential advantage is that no fund manager (and its associated risks) is involved.
- 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 most equity holdings in balanced funds. They offer long- and short-term benefits and are ideal for aged investors.
Tax Requirements
First-time investors should understand the tax liabilities associated with mutual funds to strategize their investments. The dividends generated under Dividend Mutual Funds are subject to a 10% tax. A capital gains tax is applied to the returns created in growth funds. A 15% tax is liable if you sell your equities within one year (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 in analyzing 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, which you can look at.