Category : New to Investing July 29, 20255 minutes read
Mutual funds are a type of investment scheme through which investors can gain the potential benefits of multiple asset classes such as stocks, bonds, and fixed-income securities. If you’re wondering how to start investing in mutual funds in India, first, identify a scheme that’s suitable for you. Broadly, you may choose from equity, debt, hybrid, index, ETFs, and fund of funds. You then need to register with an AMC and complete your KYC. Lastly, decide the investment mode, i.e. lumpsum or SIP, the investment duration, and investment amount.
Introduction
Mutual funds are a type of investment scheme through which investors can gain the potential benefits of multiple asset classes such as stocks, bonds, and fixed-income securities. In mutual funds, money is pooled together from multiple investors and managed by professional fund managers. So, how can you start investing in mutual funds in India and gain the potential benefits of this investment scheme? Read this guide to find out more!
In this guide, we will learn about mutual fund investments and how you can start investing in them. We’ll understand the different methods to invest and also dwell into the potential benefits of mutual fund investments.
Let’s explore the step-by-step process of investing in mutual funds.
Identify a Scheme
There are several different types of mutual funds which may be suitable for different investors. The type of scheme you choose to invest in depends on your goals and risk appetite. Broadly, mutual funds can be divided into the following categories:
Equity Funds
Equity mutual funds invest in equities or stocks. As a result, the performance of these funds is dependent on market conditions and may be affected by volatility. Equity funds are thus generally recommended for investors with a higher risk appetite and long-term investment horizon, as they may be able to ride out any short-term volatility.
Certain equity funds such as large cap funds, invest in stocks of bluechip companies. In simple terms, these are some of the largest companies in India and are generally household names. Such funds may be less risky than small and mid cap funds as their larger size and market value may protect them from market volatility. Nevertheless, as an investor, you must always remember that returns from any scheme are not guaranteed.
Learn more about what equity funds are, their benefits, risks and types.
Debt Funds
Debt funds are relatively lower-to-medium risk funds and invest in fixed-income assets. Fixed-income assets such as corporate bonds may hold higher risk than liquid securities such as treasury bills, money market instruments, etc.
Debt funds may be suitable for investors with a lower risk appetite, however, these schemes may generate low to medium returns, making them a low-risk, low-return investment. While learning about mutual fund investments, it is important to remember that even low-to-medium risk investments are subject to risks such as inflation risk, interest rate risk, credit risk, etc.
Read more about what debt funds are, their types, and benefits.
Hybrid Funds
As the name suggests, hybrid funds are a mix between equity and debt instruments. They may allocate a different percentage of their corpus to either assets. This is generally determined by the investment strategy and market conditions
For example, a conservative hybrid fund may invest a greater section of their corpus in debt, making it suitable for an investor with a lower risk appetite. Whereas, an aggressive hybrid fund may aim to generate returns by investing in high-risk, equity securities, making it suitable for investors with a high risk appetite. In general, these schemes aim to give investors the benefit of diversification across asset classes.
Learn more about the meaning of hybrid funds in India and their various types.
Index Funds
Index schemes may invest in stocks or bonds and their main goal is to track an underlying index. Equity index funds such as a Nifty 50 index fund tracks the Nifty 50 index. This may be a suitable investment scheme for investors seeking to invest in a variety of stocks. Essentially, investors may gain from the performance of multiple stocks in the market, instead of investing in stocks of one or two companies. As they are passively managed, these schemes may generally have a lower expense ratio. However, they are also considered a high-risk investment.
Explore more about the meaning of index funds and how they work.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds or ETFs are similar to index funds; they track an underlying index. However, what differentiates them is how they are traded. ETFs allow investors to engage in intraday trading, and are directly traded on the stock market. The price of an ETF fluctuates throughout the day whereas the Net Asset Value (NAV) of index funds is only calculated after the market closes.
ETFs are also high-risk investments, with potential to generate high returns in the long-run. However, to invest in ETFs investors need a DEMAT account.
Fund of Funds
Fund of Funds are schemes that invest in other mutual funds. Rather than directly investing in individual stocks, bonds, or securities, money from investors is pooled to invest in other schemes such as mutual funds, exchange-traded funds (ETFs), hedge funds, or other types of funds. They may be suitable for investors seeking diversification of their investment portfolio.
Learn more about how to choose a mutual fund before starting your investment journey!
Register with an AMC
To register with us, visit our website and click on the login button.
Next, enter your PAN number and verify your PAN with an OTP.
Then, enter your personal details including name, date of birth etc.
Fill in your nominee and bank details to complete your registration!
Complete your KYC
KYC or Know Your Customer is a process used by financial institutions and other businesses to verify the identity of their clients. During the KYC process, customers are typically required to provide personal information, such as government-issued identification, proof of address, and sometimes additional documentation.
Decide Between SIP and Lumpsum
Before investing in a mutual fund, you need to decide whether your investment is going to be made via SIP or lumpsum.
In SIP or Systematic Investment Plans, you may invest as little as ₹500 or ₹1000 in periodic intervals. There are several benefits of investing through SIPs; compounding of investments, spread out risk, Rupee Cost Averaging, and more. When choosing to invest through SIP, you need to decide the investment duration and investment amount.
If you have a lumpsum of money, you may choose to invest a larger amount all together through lumpsum. Investing through lumpsum may be a little risky but may be suitable for investors who cannot invest regularly. While investing through lumpsum, you need to decide the duration of the investment and the investment amount.
Read more about SIP vs lumpsum and choose a suitable investment method!
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Investing in mutual funds involves several steps. First, identify a scheme that aligns with your goals and risk tolerance. Common options include equity funds (higher risk, long-term growth), debt funds (lower risk, steady returns), hybrid funds (mix of equity and debt), index funds (track a specific market index), ETFs (similar to index funds but traded on the stock market), and fund of funds (invest in other mutual funds for diversification). Next, register with an Asset Management Company (AMC) by providing your personal and bank details. Complete the KYC (Know Your Customer) process for identity verification. Then, decide between investing via SIP (Systematic Investment Plan) for periodic contributions or lumpsum for a one-time large investment. SIPs are suitable for spreading risk and compounding returns, while lumpsum investments may suit those with immediate capital. Each method has its pros and cons, so choose the one that fits your financial goals.
Let’s discuss why investing in mutual funds may be suitable for you.
Diversification
Mutual fund investments are diversified as they invest in different assets. Through a single investment, you may gain the benefits of investing in multiple asset classes such as stocks, bonds, etc. Diversification helps spread out risk; poor performance of any one asset can be offset by superior performance of another asset.
Even in mutual funds that invest in specifically one asset class, for example, equity mutual funds, the investment is spread across different types of equities such as small cap, mid cap, and large cap.
Wealth Creation
Mutual funds aim to create wealth for investors in the long-term. By compounding potential returns and through professional management, mutual funds aim to balance the risk and return. Although returns from mutual funds are never guaranteed, investors stand to potentially gain the benefits of long-term wealth creation.
H3: Liquidity
Most mutual funds are considered to be a liquid investment. Aside from some schemes such as ELSS funds, most mutual funds do not have a lock-in period and investors are free to withdraw their investments whenever required – in case of emergency or otherwise.
Tax Benefits
Some schemes such as Equity-Linked Savings Schemes allow investors to gain tax benefits under Section 80C of the Income Tax Act, 1961. Under this, investors can save tax up to ₹48,600.
Take charge of your financial future by starting an SIP today. Unlock the power of diversification, tax savings, and long-term growth—all in one investment!
Mutual funds can be a suitable investment option due to their multiple benefits. They offer diversification by investing in various assets, helping reduce risk. Even single-asset funds, like equity mutual funds, spread investments across market segments such as small, mid, and large cap stocks. Mutual funds also support long-term wealth creation through compounding and professional management, though returns are not guaranteed. Most mutual funds provide liquidity, allowing easy withdrawal, except in schemes with lock-in periods like ELSS. Additionally, investors can enjoy tax benefits up to ₹48,600 under Section 80C through eligible schemes like Equity-Linked Savings Schemes (ELSS).
- Mutual funds are investment schemes where money is pooled from investors and managed by professional fund managers. It offers exposure to various asset classes like stocks, bonds, and fixed-income securities.
- There are several types of Mutual Funds:Equity Funds: Invest in stocks, suitable for high-risk, long-term investors.
- Debt Funds: Invest in fixed-income assets, low-to-medium risk with lower returns.
- Hybrid Funds: Combine equity and debt for diversification, suitable for varying risk appetites.
- Index Funds: Track a market index like Nifty 50, passively managed with lower expense ratios but higher risk.
- ETFs: Similar to index funds but traded throughout the day, requiring a DEMAT account.
- Fund of Funds: Invest in other mutual funds for greater diversification.
- To start investing, investors need to first choose a scheme based on risk and goals. Then, you need to complete your KYC (identity verification) and decide between SIP (small periodic investments) or Lumpsum (one-time large investment).
- There are several benefits of investing in mutual funds. Diversification, long-term wealth creation, liquidity, and tax benefits (e.g., ELSS funds under Section 80C).
