We are continuously investing our time to research the market & collaborate the knowledge for you so that you will be able to find the complete beginner’s guide of Mutual Fund Investments in one complete article. In this article, we have discussed the advantages of mutual fund investments & mutual fund investment risk. Also, if you go ahead with this article, you will know How to pick up & buy the best mutual funds, which will generate a good mutual fund investment return for you & also you will be able to know all the ans of your Ifs & buts of your mind related to Mutual Funds.
If you want to know the power of Mutual funds & the power of compounding, then you start mutual fund investing as early as possible; as I have already shared, how long you are investing is much more important than how much you are investing. We have already discussed how investing can be one of the best sources of passive income & one of the major important aspects of earning from investments is to invest in stocks or equities. So, there are two common methods there to invest in stocks.
- Buying direct stocks
- Investing in stocks through Mutual Funds
Here you can read Best Investment Plan in India for Middle Class with High Returns. We have already discussed buying direct stocks & today, we are here to discuss how you can start Mutual Fund Investments from scratch & is mutual fund investment good? However, before investing in any Mutual Funds, you should consider the below points, which will play an important role in Mutual Fund Investments.
- What are Mutual Funds?
- Advantages of Mutual Fund Investment.
- Disadvantages of Mutual Fund Investing.
- What are the different types of Mutual Funds?
- Tax implications on Mutual Funds?
- How to select Mutual Funds?
- Where & How to Buy Mutual Funds?
What are Mutual Funds / Mutual Fund Investment Definition?
As I earlier said that In an Investment strategy, you could buy direct stocks. But investing in direct stocks without proper knowledge can be a bit risky. To reduce the direct stocks investment risks, Mutual Funds Investments come into the picture. So many experts are there to pick the best stocks to invest in & why can’t we give them the flexibility & autonomy to do this for us? So, they are running a fund on your behalf & the fund will have a size, which is in hundreds or thousands of crores depending on the size of the mutual fund. Retail investors like us buy units of that fund. The fund manager makes investments with our money on our behalf. They would invest in stocks, fixed deposits, gold, corporate bonds, etc.. All these things are decided based on the type of mutual funds. So, we get the benefits of their expertise without doing any hard work at all. That is why Mutual Funds is one of the brilliant ways to enter into the investing world.
Advantages of Mutual Fund Investment:
You invested money in the mutual fund company managed by an experienced fund manager & his team. Their job is to continue monitoring the stocks performance & economic variables. As per the changing market condition, they optimize your portfolio. In that way, you can make the best possible mutual fund investment return without tracking the best investment opportunities.
One of the good benefits of Mutual fund investing is you can withdraw your money whenever required. Maximum mutual funds don’t have any lockin period except ELSS mutual funds & complete the withdraw process within 1 to 2 business working days. You will not get this type of flexibility in other types of investing like Fixed deposits, Investing in real estate etc.
There are a variety of mutual funds available in the market to select & invest. You can choose the right mutual fund for investing as per your choice & goal settings. Starting from high risks, high rewards ( Equity funds) to low risks, Low mutual fund investment return (Debt Fund), Mutual is perfect for all types of investment objectives.
You can start mutual fund investment with a minimum amount of as low as Rs. 100. You do not need any fixed amount to start your Mutual fund investing journey.
Good Mutual Fund Investment Return:
Mutual fund investment for long-term, Equity funds have given the highest mutual fund investment returns compared to other investments plans. Because mutual funds companies invest our money to the companies helping our country grow, you are getting the equal benefits of the invested companies’ growth. So, you will be able to make your dream corpus with mutual fund investment for long-term Mutual Fund Investments. You can check the amount needed to achieve your dream corpus by using calculator for mutual fund investment.
In India mutual fund investment are regulated by The Securities & Exchange Board of India (SEBI). SEBI is a goverment agency & ensures the transparency of the mutual funds in the market.
You can easily make a diversified portfolio with cost-effectiveness. As you have a mandate with the online discount broker, when you have invested your money in a mutual fund, your money will be invested in different company’s equity shares & Debt. Chances of getting positive growth increase.
Disadvantages of Mutual Fund Investing:
Greedy Mutual Fund Company:
Many mutual funds companies are only willing to make more money by running the mutual fund. And you already know that how mutual funds companies are making money. If you remember, mutual funds companies are making money with the expense ratio. So, the company spends a lot of money advertising the mutual fund instead of investing in market research & hiring a good fund manager. Because the more & more money they can accumulate from the market then more & more they can collect from the fund as an expense ratio & more & more money they will make from the fund. Fund companies don’t earn from the fund performance; they only earn from the expense ratio. So, before selecting any mutual fund for the investment, you should research well about the fund company & the fund manager managing the particular mutual fund.
Mutual Fund Investment Returns are Limited:
You can not expect a massive mutual fund investment return like you can earn a massive return from investing in stocks directly. Because when to invest in the market & when to withdraw money from market is not completly in Fund Managers Hand but in our (Investor’s) hand, what happens in reality, when the market is growing (Bullish), then everyone started investing in mutual funds & when the market is correcting (Bearish), then most of us withdrawing our money. But the process should be the opposite. So, when investors put their money in any mutual fund, then the fund manager is bound to invest in a bullish market ( buying high price stocks). But, when investors are withdrawing their money fund manager is also bound to sell the stocks at a lower price to make the payment of the investors. In that process, the fund manager can only book a decent amount of profit, but if you invest directly in stocks, you can make huge returns. Let’s say more than 100% return in 1 year, Yes this can also be possible in direct stock investing but not possible with mutual fund investing.
What are the different types of Mutual Funds?
Equity Mutual Funds:
These funds invest your money in equities or stocks. That also has different categories. For example, it could be a Large Cap. Large-cap means the big companies. So. the top 100 companies are called Large Cap or large capital companies. Then there is Midcap which could be 101st to 200th companies. Then there is small-cap companies that rank after the 200th company lists.
As per the Market capitalization, Large-cap companies have a market cap of Rs 20,000 crore or more. Meanwhile, the market cap of mid-cap companies is between Rs 5,000 crore and less than Rs 20,000 crore. Small-cap companies have a market cap of below Rs 5,000 crore. Multi-cap funds are diversified equity funds that invest in stocks of companies with different market capitalizations. The investments are made in varying proportions to meet the investment objective of the fund.
Debt mutual Funds:
Its like fixed deposits. You will get an assured income because Debt mutual fund investment risk is very low & these types of mutual fund investment return are also low compare to Equity mutual funds. There are different types of Debt Funds available to invest in with low risks.
- If you want to invest a brief period, you can go with the liquid fund. Liquid funds are debt funds that invest in fixed-income securities such as certificates of deposit, treasury bills, commercial papers, and other debt securities that mature within 91 days. In addition, liquid funds do not come with a lock-in period. Therefore, these funds are suitable for risk-averse investors.
- Ultra Short Duration Funds are debt funds that lend to companies for 3 to 6 months. Although all these Mutual Funds are low-risk funds owing to their low lending duration, they are slightly above liquid funds in the risk spectrum but still one of the lowest risk categories of Schemes to invest in.
- Low Duration Funds have a higher maturity than liquid funds and overnight funds but lower maturity than short, medium and long duration funds. These funds allow investors to park their money for 6-12 months and earn returns better than a regular savings account.
- Short Term Fund: Short duration funds are debt funds that invest in debt and money market securities such that the duration of the fund portfolio is between 1 to 3 years.
- Medium Duration Fund: These mutual funds select bonds/debt for investment such that the average maturity (remaining) period for the portfolio is between 3 to 4 years (Macaulay duration). Suitable For: Investors who want to invest for 1-3 years and are looking for an alternative to bank deposits.
- Gilt funds invest in low-risk debt instruments such as government securities, ensuring the preservation of capital and moderate returns. As a result, compared with a typical equity fund, a gilt fund offers better asset quality despite the relatively lower return it offers.
Hybrid Mutual Fund:
The third category is a Hybrid fund & you can say it is a balance fund. It will have some part of equity & some part of Debt. So if you don’t want to take high risks but also want to gain some good return compared to a Debt mutual fund, you can go ahead with a Hybrid Mutual fund.
Tax Saving Mutual Fund:
This also has tax-saving mutual funds. Many peoples invested in tax-saving mutual funds or ELSS (Equity Linked savings scheme). Its benefits is upto 1.5 Lakh investments in a year will be complete tax-free. Secondly, one of the important aspects of this type of ELSS fund is the locking period of min 3 years. So, once invested, you will not be able to withdraw the amount for min 3 years. It does not mean every year you have to invest in this fund. You can start or stop investing in this ELSS fund, but the amount you have invested in tax saving mutual fund can not be withdrawn before three years.
Like every stock has a price, every mutual fund has a NAV (Net Asset Value). Think of it as a price of a unit of that fund. So don’t be too scared. Its not that hard to understand. So, based on the NAV price, you buy the unit of any particular mutual fund.
So, as an example, let say that any particular mutual fund NAV is Rs. 20 & you want to invest Rs. 100. Then you will get five units of that particular mutual fund. Then, however, the mutual funds perform basis where it is investing all its money, the NAV keeps increasing accordingly. This also means that is the NAV is increasing, it can decrease, especially when it is an equity-linked mutual fund. Because the equity market can rise or fall depends on the volatility of the market & based on that, Mutual fund’s NAV can go up or down.
Now when you sell mutual funds, there are tax implications & that is the 3rd segment I want to touch upon.
What are TAX Implications?
If you invest in equity-linked mutual funds or hybrid mutual funds, Its treated like capital gain like stocks. Capital gain means whatever profit you have booked after investing in these mutual funds. Then you have to pay taxes on that. If you hold it for a year, which means whatever mutual fund you have bought did not sell until one year, it becomes a Long-term capital gain tax. If you sold within one year, then it becomes short term capital gain tax.
Short Term Capital gain tax in India as of now is 15%. So that means after selling your mutual funds units if you have gained Rs. 100 within a year, then you have to pay Rs. 15 to the Indian goverment as a short term capital gain tax. If you sell the mutual funds units after a year, then as a long term capital gain tax, you have to pay 10% to the Indian goverment. But the catchy thing is that if your profit comes under 1 Lakh, it will be tax-free for you.
So, my personal suggestion to you is that if you invest in Equity linked mutual funds or hybrid mutual funds, you should not withdraw your money before one year of completion. To get a better return, please try to hold it for min 5 to 7 years.
Suppose you sell the Debt mutual fund & whatever profit you have earned from selling the Debt mutual fund will be added as your income. And as per the income tax slab, you have to pay the taxes. So, Its not part of Capital gain (Short Term or Long Term). But, it is counted as your income from your other sources & you pay income tax on that.
How to Select a Mutual Fund:
When you invest in mutual funds, what do you have to check before investing in any mutual funds & which mutual fund investment is best? You should always check the fund returns & do the mutual fund investment calculation before start investing.
- Knowing the company of the mutual fund.
- Knowing its historical performance. But you should know that In finance, future prediction can not be possible based on historical performance. Still, normally we check the historical performance to get an idea how these fund has performed in the past.
- Then the NAV (Net Asset Value) of the mutual fund. You can consider it as a stock price. Based on the stock price, you can not predict you should buy or sell the stock. There are lots of other factors you need to consider before investing in any fund. But you should know the NAV because your money will convert into fund units based on the Fund NAV.
- Then there is something called Expense Ratio. The expense ratio is how much money you have invested in the mutual fund; out of that, how much will go as an expense to manage the fund. That means, as per the Mutua fund norms, if you invest Rs. 100 then the complete amount will not be used as your investment. Instead, some percentage of your money will go as an expense & after deducting the predecided expense percentage, your money will be invested in the market. The expense ratio can be as low as 0.1% & as high as 2 to 2.5% can go towards managing the fund.
- Exit load is some fee charged by the mutual fund company if you exit the mutual fund within a certain period from the investment date. It varies from Mutual Fund to Mutual Fund. Usually, you should check that as low as exit load should be good for you. Generally, if you exit the fund within one year, then the exit load typically 1%. However, if you hold it for a year, then the exit load will be zero percent after a year you want to exit. But before you start investing, you should always check the terms & conditions.
- Before selecting mutual fund investment, we need to understand the standard deviation of the mutual fund. Standard deviation is the risk & volatility measure of any mutual fund. It measures how to spread out the numbers from an average value. Standard deviation measures the volatility of the returns from a mutual fund scheme over a particular period. It tells you how much the fund’s return can deviate from the historical mean return of the scheme. For example, if a fund has a 12% average return and standard deviation of 4%, its return will range from 8% to 16%. So with this, we can understand that a fund with a low standard deviation tends to be more predictable & a high standard deviation shows price volatility.
Now how to know that fund is taking the right amount of risks? To know this, we need to understand the return generated by the fund with respect risk it has taken. In finance, the Sharpe ratio (also known as the Sharpe index) is the average return earned more than the risk-free rate per unit of volatility or absolute risk.
The Twitter handle (1pagefinance) described it very clearly with very simple words.
So, you should always check for better Sharpe ratio, which indicates with equal risks, the fund has generated more returns than comparing to any other fund. So, better the sharpe ratio, better the fund.
Important Points to Consider before Mutual Fund Investment:
- Take data from a single source for comparison.
- Sharpe ratio is only useful to compare the funds.
- Beware! A higher sharpe ratio maybe due to low standard deviation.
- Sharpe Ratio should not be looked alone. It needs to be looked along with alpha, beta & standard deviation of the fund.
How To Do Mutual Fund Investment?
- Parent’s way of Buying.
- New Generation way of Buying.
Parents Way of Mutual Fund Investment:
This is also a famous method of buying any mutual fund. In this method, usually, you go to any mutual fund agent & you asked them to suggest some good mutual funds to make your portfolio. The agent suggests you invest in some mutual fund & you started investing through the agent. The agent gets some commission from the money you have invested.
New Generation Way of Mutual Fund Investment:
So, now we have the option to invest our money in a mutual fund directly without taking any help from any mutual fund agent. That means you go online, made a demat account with any online discount broker. Then, you researched the fund before investing & started investing to the mutual fund & save the commission earned by the mutual fund agent. There are many online discount brokers available on the internet & they do not charge anything for buying & selling mutual funds. You need to pay only the fund’s expense ratio & you do not need to pay any amount for any agent or any middle man.
How to Mutual Fund Investment For Beginners?
There are multiple online discount brokers available on the internet, which helps you open your demat account without any physical document submission within 10 to 15 minutes. So here I am listing all the safe & verified online discount broker names by which you can start your Mutual Fund Investment journey.
- Groww App
- ET Money
- My way
- Paytm Money
- Zerodha Coin
These are some safe & verified discount brokers available & you can start with anyone as per your choice. You can also search on youtube to check all the online platform’s user interface & their terms & condition. For the last two years, I am using the Groww app for my Mutual funds, Direct Stocks & Gold investments. I found the Groww app user interface is excellent & easy to understand. But some features are still missing in the Groww app, like the pause of mutual fund investment, yearly increment of investment of the mutual fund, etc., which you can get in the Zerodha app. Also, here you should know that you can always create two, three demat accounts.
If you want to enter the investing world & you have already invested in GOLD or don’t want to invest in GOLD or currently don’t have enough money to buy real estate& you have fed up with investing in Fixed Deposits then my personal suggestion would be to please start your Mutual fund journey today only. Whatever may be your age. Maybe you are in your twenties, thirties or forties, and you should start your Mutual fund from today.