Investing in Mutual Funds

A Beginner’s Guide – Part II

In last week’s blog, we spoke about what mutual funds are and their various benefits. It is now time to understand more about investing in them and growing your wealth.

Before investing however, it is essential to know about the different types of mutual funds available today as each of them come with unique benefits and features.

Types of Mutual Funds

Did you know that there are multiple types of mutual funds available in the market for investing? They are generally categorized either according to maturity period or asset location. Investors can decide which fund to invest in based on their risk appetite as well as the investment amount.

Based on Maturity Period

• Open-ended Mutual Funds

These are funds that are available for subscription throughout the year and do not have a fixed maturity period. Therefore, as an investor, you can buy or sell any part of your investment at any given time at a price that is linked to the fund’s NAV. Systematic Investment Plans (SIPs) are an example of this.

• Close-ended Mutual Funds

These funds come with a maturity period at the time of its launch. Additionally, investors can purchase these funds only during a specific period of time. When the fund matures, the redemption amount will be transferred to the investor’s account.

Based on Asset Allocation

• Equity Mutual Fund

The objective of these funds is to generate capital appreciation over a long period of time and investment is mostly in equities. While the risk is higher, the rewards can also be high. These mutual funds are best suited for you if you plan to stay invested for 5 years or more and are further classified into large-cap, mid-cap, multi-cap funds etc.

• Debt Mutual Funds

This type of fund is advisable for those looking to avail a steady and regular income. Investments are made in fixed-income securities such as corporate debentures, bonds, etc. The risk is lower and therefore, the return potential is slightly lower as well. Debt mutual funds are suitable for short term goals ranging from 1 to 3 years. These are further classified into short duration funds, liquid funds, etc.

• Hybrid Mutual Funds

The corpus in hybrid funds is invested in a mix of equity as well as debt instruments and provides the best of both the above types of funds. Hybrid funds can be further classified into conservative hybrid funds, balanced funds, etc.

• Solution Oriented Funds

Sometimes you may be looking to invest for a specific purpose such as your marriage, child’s future, or retirement. Solution oriented funds will help you realise your goals and come with a lock-in period of 5 years.

In addition to the above, other types of mutual funds include Index funds, Exchange Traded Funds or ETFs, etc. 

Your investment should be based on what works best for you depending on your financial goals, risk appetite, and how long you are willing to stay invested for. As is the case with most investments, there is no ‘one-size-fits-all’. Therefore, carefully analyze which type of mutual fund is best suited for you before investing your hard earned funds into the same.

Once this is done, the next step is to go ahead with the actual investment. In this next section we will explain what steps you need to take to begin your investment journey.

Ways to Invest in Mutual Funds

There are two ways to invest in mutual funds – offline and online:

• Offline
  • By visiting your nearest fund house directly and submitting your documents
  • By contacting a broker and submitting the application through him/her
• Online
  • Through the website of a specific mutual fund house or other financial websites dealing with multiple mutual funds
  • Through an app

Things to Keep in Mind Before Investing

Investing in mutual funds is a great way to grow your funds instead of letting them sit idle in your savings account. However, here are a few things to consider before you begin investing –

• Know the Basics

Before investing know all that you can about the various jargons involved in investing such as exit load, NAV etc., the impact of investing on your personal finances, and its alignment with your financial goals

• Performance of the Fund 

If you have decided on a fund to invest in, compare its 5 years’ annualised returns with other funds and see which one has performed better over time. If you are investing in more than one fund, ensure that you balance the risk with the returns. Don’t underestimate risk but do not be overly cautious either

• Read the Offer Documents Carefully

This rule applies to every type of investment. Carefully go through all the features, benefits, or even conditions that are in place before investing so as to avoid unpleasant surprises later.

• Be Patient

As compared to most other investments, mutual funds generally generate higher returns but the secret here is to stay invested for a longer duration. The longer you are invested and the more balanced your investments are, the higher your returns will be over time.

In Conclusion

Mutual funds are perhaps one of the most popular investment options available today due to their ease of access, great returns, and ability to grow wealth. While there is a certain degree of risk involved and tax implications, choosing the right fund to invest in that is aligned with your goals can help you turn your idle savings into a large profit. Becoming a lakhpati or even a crorepati does not have to be a distant dream any more.

Are you planning to invest in mutual funds? Do you want to know more about this vast topic? Let us know in the comments below.