How to invest in Mutual Funds?

Mutual funds have become one of the most popular investment choices for retail investors in India. At the end of March 2022 (31st March 2022) total assets under management (AUM) of the mutual fund industry stood at nearly Rs 38 lakh Crores.* 54% of these assets are of retail and HNI investors (as on 28th February 2022). There are nearly 5.2 Crore SIP accounts and average monthly SIP inflow is over Rs 11,000 Crores (as February 2022), according to AMFI. With rising investor awareness, the popularity of mutual funds is set to grow further but mutual funds still comprise a smaller percentage of household savings. We will explain benefits of mutual funds and how to invest in mutual funds.

How do mutual funds work?

Mutual funds work on the basis of pooling of money from a large number of investors. The fund house mobilizes money from investors and invests in various financial securities like stocks, bonds etc. The securities are selected according to the investment objective of the fund. For example, if the investment objective of the fund is capital appreciation, the fund will invest primarily in equities. However, if the objective is to generate income, the fund will invest in money market or bonds. Mutual fund schemes are managed by professional fund managers whose aim is to ensure that investment objectives are met.

Why should you invest in mutual funds?

Before figuring out how to invest in mutual funds, you should know why invest in mutual funds.

  1. Risk Diversification:

    Mutual funds offer risk diversification by investing in a portfolio of stocks or bonds across many sectors or issuers. A diversified portfolio reduces risks associated with a single stock or bond.

  2. Professional management:

    Mutual funds are managed by professional fund managers whose aim is to ensure that scheme investment objectives are met. Fund managers are assisted by research team which helps in selecting stocks and managing the scheme portfolio.

  3. Range of solutions:

    Mutual funds offer wide range of solutions for various investment needs and risk appetites. Investment in equity funds may be for meeting long term goals like retirement, children’s higher education, marriage etc. while investment in debt funds can be if you want regular income or have shorter investment needs. Hybrid mutual funds combine both, equity and debt, for investors with varying risk appetites

  4. Modes of investment :

    You can invest in lump sum or through Systematic Investment Plans (SIPs) or Systematic Transfer Plan (STPs) depending upon your specific financial situation and needs. We will discuss how invest in lump sum, SIP and STP later in this article

  5. Tax benefits:

    Mutual funds are tax efficient investment solutions. In equity funds, short term capital gains (held for less than 12 months) are taxed at 15% and long term capital gains (held for more than 12 months) are tax exempt up to Rs 1 lakh in a FY and taxed at 10% thereafter (excess of Rs 1 lakh of capital gains). In non-equity funds, short term capital gains (held for less than 36 months) are taxed at as per your income tax rate and long term capital gains (held for more than 36 months) are taxed at 20% after allowing indexation benefits. Interest income from most traditional fixed income investment is taxed as per the income tax rate of the investors. For investors in the higher tax brackets, mutual funds enjoy a significant tax advantage compared to traditional fixed income investments.

  6. Tax rebate :

    To avail Section 80C tax benefit, you can invest in ELSS mutual funds.

  7. Liquidity:

    Open ended mutual funds are one of the most liquid investments after bank deposits and far more liquid than investments like, life insurance plans, infrastructure bonds, post office schemes etc. Investors can redeem their units in open ended funds usually on a on T+3 (transaction + 3 days) basis. Liquid, overnight, low duration and ultra-short funds can usually be redeemed on T+1 day.

How to buy mutual funds?

Let us now discuss how to start investing in mutual funds. There are various ways of investing in mutual funds depending on your preferences and convenience. There are pros and cons of each. Before we discuss, different ways to investing in mutual funds, there are some requirements you must fulfil before you start investing in mutual funds.

How to start investing in mutual funds?

You need to be Know Your Client (KYC) compliant before you start investing in any financial product like mutual funds. To be KYC compliant you need to have the following documents

  • Recent passport size photograph
  • Proof of identity (e.g. Passport, PAN card)
  • Copy of your PAN card
  • Proof of address (e.g. Aadhaar card)
  • Duly filled KYC form. You can obtain the KYC form from the offices of Registrars and Transfer Agents (RTAs) or Asset Management Companies (AMCs). You can also ask get in touch with a mutual fund distributor or financial advisor to help you fulfil KYC requirements.

You can submit these documents to the AMC or RTA for processing, verifying and updating your KYC status. One of the steps in verifying your KYC is In Person Verification (IPV). In person verification can be done by visiting the office of the KYC Registration Agency (KRAs), AMCs or RTAs. You should know that the RTAs are also KRAs. Your mutual fund distributor can also do the IPV for you. Investors should also know that many AMCs offer the facility of online KYC, whereby you upload the KYC documents and do your IPV over video call.

How to check your KYC status?

KYC processing usually takes a few days. You can check your KYC status online using your PAN by going to the website of Central Depository Service Limited. Provide your PAN and check your KYC status. If your KYC has been verified, the status will show “MF-Verified”; this means you are KYC compliant. If your KYC has not been verified, the status will show “Pending”. If you are unable to check your KYC status online, you can contact with a mutual fund distributor or AMC / RTA. Once you are KYC compliant, you can start investing in mutual funds. Let us know discuss how to invest in mutual funds.

How to invest in mutual funds

  1. How to invest in mutual funds through a mutual fund distributor?

    AMFI registered Mutual fund distributors provide financial advice and help investors with mutual fund transactions. Distributors are paid commissions by the fund house; therefore, they do not charge any fee from investors. The cost of mutual fund units purchased through these distributors (regular plans) is higher than units directly purchased from AMCs. For new investors, it will be wise to invest through a mutual fund distributor. You should know that mutual funds are subject to market risks. Different mutual fund products have different risk / return profiles. A mutual fund distributor or financial advisor can help you select the right mutual fund product for your risk appetite and investment needs. If you need help in understanding your risk appetite, a financial advisor can also help you in that regard as well.

  2. How to invest in mutual funds directly with the AMC?

    You can invest directly with the AMC by visiting their office or through their online portal. If you are a new investor then you need to submit your KYC documents either at the AMC office or online. You can buy direct plans, expense ratio of which is less than regular plans from the AMC. If you are an experienced investor, understand your risk appetite, and have knowledge of mutual fund products and financial markets, you can invest in direct plans. The returns of direct plans are higher than returns of regular plans.

  3. How to invest in mutual funds through Registered Investment Advisors (RIA)?

    You can invest through SEBI Registered Investment Advisors (RIA). RIAs do not get commissions from Asset Management Companies. You can invest in direct plans through RIA and the RIA may charge you a fee for his or her services. One of the perceived benefits of investing through an RIA is that there is no conflict of interest, as the RIA does not get commissions from the AMC. However, it must be stressed that mutual distributors are also supposed to give you unbiased advice and put your interest over his / her interests, as codified in AMFI’s Code of Conduct for mutual fund distributors. You should do your own due diligence before deciding to invest through mutual fund distributor or Registered Investment Advisor.

  4. How to invest in mutual funds through Registrars and Transfer Agents (RTAs)?

    Registrars and Transfer Agents process mutual fund transactions on behalf of the fund houses. If you are transacting through RTAs, then you should know which RTA services the AMC whose scheme you intend to buy. You can go to the RTA websites or visit their offices to check which AMCs are serviced by the respective RTAs. You can invest both in direct and regular plans through the RTAs. A benefit of investing through RTAs is that you can do transactions (investments, redemptions, switches etc) of multiple mutual funds of different AMCs, provided the AMCs is questions are serviced by the same RTA.

  5. How to invest in mutual funds online?

    To invest through online portals your KYC has to be registered. Some of the portals even help you in getting your KYC registered. Those who are thinking how to invest in mutual funds online have several options.

    • How to invest in mutual funds online through AMC portals:
      All mutual fund houses also provide online investing option through online banking for payments (investments). While investing online you should carefully check whether you are investing in regular or direct plans.

    • How to invest in mutual funds online through RTA portals:
      All RTAs also provide online investing option through online banking for payments (investments). Check whether you are investing in regular or direct plans when you are investing online. One advantage of investing online through RTA portals is that you can view your portfolio of mutual fund schemes of the AMCs serviced by the RTA in one place. You can also view your capital gains statement on the RTA portals.

    • How to invest in mutual funds online through mutual fund distributors’ websites:
      Several mutual fund distributors also provide online investing facility through their own website. One advantage of investing online through your distributor or financial advisor is that you can view your entire portfolio of mutual fund schemes in one place.

  6. How to invest in mutual funds through stock broker?

    Stock brokers providing online trading and demat services, also offer online investment in mutual funds. Stock brokers, who offer these services are also AMFI registered MF distributors, and therefore, they offer regular plans.

  7. How to invest in mutual funds through your bank?

    Most banks offer wealth management services through which you can invest in mutual funds. Since banks are also mutual fund distributors, you will be investing in regular plans. Some banks may offer mutual fund related services both through the wealth managers in the bank branches or provide online mutual fund investment facilities.

  8. How to invest in mutual funds through mobile apps?

    Many AMCs and all RTAs provide facilities of making mutual fund transactions through their mobile apps. You can do all types of mutual fund transactions e.g. one time investments, additional purchases, SIPs, STPs, SWPs, switches, redemptions etc through these mobile apps. These apps can be downloaded from Google Play Store for android phones. Some mutual fund distributors also have mobile apps for making mutual fund transactions.

How to invest in mutual funds from your bank account?

Investors should know that you can invest in mutual funds only from your own bank account through cheque or online banking. You can also invest in cash but only up to a maximum limit of Rs 50,000 in a financial year. You should also know that third party transactions are not allowed in mutual funds. In other words, someone else cannot invest on your behalf. Your name should be printed on the cheque leaf or you should be the account (first or joint) holder of the savings bank account if you are making payments using online banking. Likewise, you cannot make investments for someone else e.g. parents, siblings, relatives or any other persons account.

You can invest jointly with your spouse, if the investment is made from a joint account where both you and your spouse are account holders. You can also invest on behalf of your minor child provided your child is the sole account holder represented by the parent/guardian. Joint holding is not allowed in a minor’s Mutual Fund folio. You can make investments for your minor child from your bank account. Once a child attains the age of 18 and becomes a major, the first thing you as a parent/guardian need to do is change the status of the sole account holder from Minor to Major. Now as an adult, your child will be responsible for tax implications.

How to invest in mutual funds based on asset classes?

Mutual funds can be classified in three broad categories viz. equity, debt and hybrid based on different asset classes like equity, fixed income etc.

  • Equity mutual funds: These mutual funds invest in equity and equity related securities. The main investment objective of these funds is capital appreciation. Equity mutual funds can be categorized further based on market capitalization segments e.g. large cap (top 100 stocks by market cap), midcap (101st to 250th stocks by market cap), small cap (251st and smaller stocks by market cap), large and midcap (top 250 stocks by market cap, minimum 35% in large cap and 35% in midcap), multicap (25% each in large cap, midcap and small cap). There are different types of equity funds based on investment strategies e.g. focused, value, contra etc. There are also equity funds which invest in particular themes or sectors (e.g. healthcare, consumption, financial services, FMCG, infrastructure, IT etc). Different equity funds have different risk return profiles. Consult with your financial advisor to understand which equity funds may be suitable for your investments.
  • Debt mutual funds: These mutual funds invest in debt and money market instruments. The main investment objective of these funds is income. Debt mutual funds can be categorized further based on maturity (when the instruments mature) or duration (interest rate sensitivity, also closely related to the maturity of the instruments) e.g. overnight (instruments which mature overnight), liquid (instruments which mature within 91 days), ultra short duration (average duration of 3 to 6 months), low (average duration of 6 – 12 months), money market (instruments which mature within 1 year), short duration (average duration of 1 to 3 years), medium duration (average duration of 3 to 4 years), medium to long duration (average duration of 4 to 7 years), long duration (average duration of more than 7 years). There are different types of debt funds based on the type of securities they invest in e.g. corporate bond, banking and PSU, Gilts, credit risk (lower rated instruments etc). Different debt funds have different risk (e.g. interest rate risk, credit risk etc) and return profiles. Consult with your financial advisor to understand which debt funds may be suitable for your investments.
  • Debt mutual funds: Hybrid funds are mutual fund schemes which invest in multiple asset classes e.g. equity, fixed income, gold, real estate investment trusts etc. The investment objectives of these funds are capital appreciation and income. The main benefit of hybrid funds is asset allocation. Asset allocation diversifies investment risk by spreading the investment of two or more asset classes. The risk profile of a hybrid fund depends on the asset allocation of the scheme. There are different types of hybrid funds with different asset allocation profiles e.g. Aggressive Hybrid (65 – 80% in equity, 20 – 35% in fixed income), Dynamic Asset Allocation or Balanced Advantage (which manages equity and fixed income asset allocation dynamically, no upper or lower limit, Equity Savings (minimum 65% in equity including hedging or arbitrage, minimum 10% in fixed income), Multi Asset Allocation (minimum 10% each in at least 3 asset classes e.g. equity, fixed income, gold etc), Conservative Hybrid (75 – 90% in fixed income, 10 – 25% in equity), Arbitrage Funds (minimum 65% in equity, using arbitrage strategy). Different hybrid funds have different risk return profiles. Consult with your financial advisor to understand which hybrid funds may be suitable for your investments.

How to invest in mutual funds for tax savings?

Investments in mutual fund Equity Linked Savings Schemes (ELSS) qualify for deduction from your taxable income under Section 80C of Income Tax Act. Units of ELSS are locked in for 3 years from the date of investment; you cannot redeem your units during the lock-in period. There is no upper limit for investments in ELSS but you can claim deduction of up to a maximum limit of Rs 150,000 under Section 80C.

How to invest in mutual fund lump sum?

Lump sum investment, also referred to as one time investment, is investing your entire amount in one go. It is the simplest form of investments. To invest in lump sum, you must select a mutual fund scheme that is suitable for your financial goal and risk appetite. You can invest in Direct or Regular Plan depending on your preferences. You should consult with your financial advisor if you need help in selecting the mutual fund scheme. You should also select the scheme option viz. Growth, Income Distribution and Capital Withdrawal (IDCW) etc. In Growth Option, the profits of the scheme will be re-invested in the scheme, whereas in the IDCW option, the profits of the scheme may be distributed to the investors at the discretion of the AMC. If your goal is capital appreciation or wealth creation, you should invest in Growth Option as you can benefit from power of compounding. If you want cash-flows from your investments at regular investments you may invest in IDCW option. You should remember that IDCW payments or dividends will be taxable in your hands as per your income tax rate.

How to invest in mutual fund SIPs?

Systematic Investment Plan (SIP) is a mutual fund investment facility where you can invest relatively small amounts at regular intervals. Through SIP investments you can invest a fixed amount in any open ended mutual fund scheme of your choice at intervals chosen by (e.g. daily, weekly, fortnightly, monthly etc). To invest through SIP investment plan, you need to register for Systematic Investment Plan by submitting a bank Electronic Clearing Services (ECS) mandate where you have to specify the SIP amount, the interval and the SIP date. Through the ECS mandate, you instruct the bank to debit a certain amount at the specified date(s) of a month and credit to the mutual fund. The ECS mandate can be submitted online or through a paper form to the AMC or RTA. You need to have sufficient balance in your savings bank account on the SIP days else your SIP transactions will fail. SIPs are ideal investments for your long term financial goals.

Summary

Mutual funds offer investment solutions for various investment tenures and goals - short term, medium term and long term. Here, not only we discussed how to start investing in mutual funds but also how to invest in mutual funds online. You should know the pros and cons of multiple mutual fund investment options available to take an informed decision. You should also make yourself aware of the multiple ways of investing in mutual funds, even if you have already invested in mutual funds through any one of these options to make sure that you are availing of the best option according to your needs and convenience.

*Source – AMFI India

For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint in case of any grievance Click Here Information on KYC, Registered Intermediaries and Grievance Redressal

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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