Investment, Mutual Funds

HOW TO INVEST IN A MUTUAL FUND

how-to-invest-in-a-mutual-fund

An investment programme funded by shareholders and is professionally managed. A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities and trades in diversified holdings.

Before investing in a mutual fund, it is important to know the different types of mutual funds:

Equity: These are funds that invest exclusively in the stocks of domestic companies listed on stock exchanges. These are high-risk funds. Equity funds are also known as stock funds. Stock mutual funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography. Invest in equity mutual fund schemes only if you have an investment horizon of at least five to seven years.

Money market: A money market fund is a mutual fund that invests solely in cash and cash equivalent securities such as Treasury bills (T-Bills), Commercial Papers (CPs), Repurchase Agreements (Repo), which are also often referred to as money market instruments. These investments are very liquid short-term investments with high credit quality. These are categorized as low-risk funds.

Debt: Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.. Debt funds are typically low-risk funds.

Hybrid or balanced: These funds invest in both fixed-income securities (debt) and stocks (equities), thereby offering a balanced portfolio to investors.

Solution-oriented schemes: These schemes are devised for particular solutions or goals like retirement and child’s education. These schemes have a mandatory lock-in period of five years.

BEFORE INVESTING

Always analyze your financial position and your financial goals, its horizon and the period for which you can invest the money in and the risk level you’re comfortable in before investing your money. Always plan according to what your ultimate financial goals are.  This will help in filtering various mutual fund options such as payment methods, lock in period etc.

BUILDING THE RIGHT PORTFOLIO

It is always advisable to plan for long-term financial goals. One should seek the help of a qualified mutual fund advisor or professional team to build your portfolio and to provide advice on asset allocation. Asset allocation is dividing your fund between different asset classes to achieve the returns that you want. Diversification of portfolio across asset classes and various instruments is the key factor to earn maximum returns on investments with the minimum risk involved.

WHY IT IS BETTER TO HIRE PROFESSIONALS

 Every mutual fund now offers a direct plan and a regular plan. In a direct plan,

Which charges lower annual expenses) you do not have to pay the distributor fee or commission. This is because in case of this type of plan, you have invested the money yourself, without going through a broker or agent. This requires active tracking, re-balancing, peachy clean switching funds, etc.

Asset management companies provide investors with more diversification and investing options than they would have by themselves.

CHOOSING THE RIGHT FUND

Short listing the right funds is one of the most important part of investing in Mutual Funds. Once you are done with the asset allocation that best reflects your needs, the next step is to look for and compare different Mutual Funds on the basis of their trustworthiness, past performance and investment philosophy. For this, you should refer to the shareholder reports and prospectuses provided by your AMC (Asset Management Company). The prospectus will detail the information related to the Mutual Fund from a legal perspective while the shareholder report can help you understand the past performance and consistency of returns.

BUYING FUNDS

After choosing funds, you can either buy funds directly from a fund house or through an intermediary.
For investing directly, you’ll have to submit filled forms, cheques, etc. at investor service centers of the mutual fund houses or registrars or invest online at the websites of the mutual fund houses.
At this stage, you’ll need to decide how much you would be willing to invest and at what frequency. Here, the options available in a broad sense are lump sum investment or Systematic Investment Plans (SIP). Lump sum is, investing the entire money that you want to invest at one go. SIP, on the other hand, means investing a fixed amount at a fixed frequency (generally monthly).

MONITORING AND SELLING

Your share in the stock market could go up or down within a matter of minutes. Hence one should constantly and rigorously monitor so that you can decide when to retain or sell your funds. You should keep the tax implications in mind while selling your funds.

Happy Investing!

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CA Rachit Jain

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