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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 a number of 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 as well as the variety of options available has made mutual funds a widely pursued investment option.

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However, it is important to acquire the basic knowledge about mutual funds and their functioning before you get started. This post gives a detailed account of the factors you should consider while making your investment and the choice of 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, as well as the principal amount. For instance, if you are investing in your children’s education, then the investment will have a long-term perspective. You could consider signing up for an HDFC Mutual Fund online if you’re looking for long term goals.

There are two variants mutual fund schemes are offered in: 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 in order to be able to invest. The KYC registration process requires your birth certificate, an address proof, and your PAN card. If you have an Aadhar Card, you can get e-KYC without any paperwork.

Calculate Risk

It is imperative to note that the investment landscape in India 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 making an investment. As you approach your time of retirement, you may want to limit your investments in equity funds 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 a majority of their holdings in debt funds, as opposed to 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 in order 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.

About Rohit Shetty

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