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Investments

5 Things to Know While Investing in the Right Mutual Fund

Direct plans are cheaper than regular plans because there is no distributor fee or commission paid to anybody else in direct plans
5 Things to Know While Investing in the Right Mutual Fund
Image credit: graphicstock
CEO and Founder, Right Horizons
3 min read
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Mutual funds have become very popular in the last 3-4 years. After demonetization, mutual funds as an investment vehicle have been recipients of strong investor inflows. Be its debt, equity, balanced or international funds, retail investors have warmed up to the idea. However, mutual funds today are just 20% of bank deposits. It shows the low penetration of mutual funds. This makes it very likely that new investors may want to invest in MFs but may not have the requisite understanding about the right mutual funds. Here, we explain 5 things that you should know while investing in funds.

How are Funds Different

Mutual funds are a well-diversified, low-cost and tax-efficient way of saving and investing your money. It is an ideal investment vehicle for those who do not have the expertise and the time to invest directly in stocks, fixed income, gold etc. When you invest in a fund, the fund manager will do the entire job of picking the investments and managing the portfolio. It is a hands-free investment.

Getting Started

Like any other investment, there are a few one-time steps you must complete before you can invest in a mutual fund. All you need is a bank account, Permanent Account Number (PAN), Aadhaar and then become KYC (know your customer) compliant. The KYC process verifies your identity as an investor. All your investments will have to be made from your bank accounts only.

Choose Funds

While mutual funds simplify the job of investing for you, the task of choosing the right funds is still a big decision. You can either choose a financial advisor to do the job for you or directly invest based on your expertise level. An advisor will provide advice that helps you invest. If you choose directly, you will need first need to choose between equity or debt or hybrid funds and then invest. Equity funds are high risk and high return. Debt funds are low risk and low return. Hybrids funds come in between, striking a balance between risk and return.

First Fund

It is always better to take the advice of an advisor when you first invest. An investment advisor is like a doctor. They are experts. Still, if you want to take the decision of which type of fund to choose, go for a balanced fund. These funds are not 100per cent equity funds and use a mix of equity and debt to give smoother returns. The equity investing gives you growth potential while the debt portion brings a bit of stability. If you need tax benefits for investments, go for ELSS mutual funds that give you tax sops under Section 80C.

Need to Know

Direct plans are cheaper than regular plans because there is no distributor fee or commission paid to anybody else in direct plans. If you don't have any requirement of getting any regular cash inflow in form of mutual fund dividends, go for the growth option. If you need regular cash. Lastly, new investors should not do lump sum investment. Instead, choose the Systematic Investment Plans (SIP) route whereby investing a fixed amount at a fixed frequency, usually per month monthly.

Do remember mutual funds are like any other investment product. There is something for everybody. So, the onus is on the investor to choose the right fund. Every mutual fund abides by the investment mandate and the taxation rules of the country. So, when you choose the fund, take your time and invest carefully. Understand everything about the fund before investing. This will result in a great investing experience.

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