Beginner’s Guide To Investing In Mutual Funds

The writer is a Delhi, India based Certified Financial Planner CFPCM, conferred upon by the
Financial Planning Standards Board. If you are an Indian resident looking for a financial plan prepared according to your needs & goals, write to her at shruti(AT)

In an earlier post, I explained what a mutual fund is and how it works. If you haven’t read it go ahead and do so because some of the terms written below are explained there.

how-to-invest-in-a-mutual-fundNow let’s understand how you can go about investing in mutual funds.

Before you can start investing in any mutual fund you need to have the following:

  1. Pan Card
  2. Bank Account in your name with MICR and IFSC details
  3. KYC (Know Your Customer) compliance, or you should have an ID proof, address proof and a recent passport size photograph to become compliant

Anyone who fulfils the above requirements can start investing in Mutual Funds.

The next step is to decide whether you want to invest in mutual funds directly or through intermediaries. If you choose intermediaries like financial advisory companies, banks, distributors etc. it means you are investing via regular route a.k.a. REGULAR PLAN. These intermediaries will guide you through the entire process of investment right from KYC requirement to final payment. They will help you in selecting a suitable scheme for you based on your goals and risk appetite. In addition to this, they will also do the leg-work like filling & submitting forms on your behalf. In return for this comfort, they will charge you a commission which will reduce the absolute returns on your investment.

You can choose to invest directly a.k.a. DIRECT PLAN with the fund house without using any intermediaries. In this case, you will enjoy higher returns on your investment, because you don’t have to pay any commissions. But there is a downside: the onus of proper research on choosing the right scheme lies on you.

A scheme is a mutual fund offering from a fund house. For example, HDFC is a fund house and they have schemes like HDFC Infrastructure Fund, HDFC Top 200 etc. Every mutual fund scheme invests in a particular sector. From our example above, HDFC Infrastructure Fund invests in infrastructure companies like L&T, Siemens etc. HDFC Top 200 invests in the biggest companies on the share market.

If you choose to invest directly, the following checklist will help.

  • KYC: KYC is a must to invest in mutual funds. It is a one-time activity, once done you don’t need to repeat it for future investments. You can check whether you are KYC compliant or not, by visiting CAMS or KARVY & entering your PAN. If you are, you can go to the next step of this checklist. If you are not you will have to fulfil the KYC requirement. It can be done either offline or online.
    With Offline KYC you need to fill a form and submit the same along with self-attested photocopies of your PAN card, latest address proof and a passport size photograph. You are also required to confirm your physical existence through an In-Person Verification or IPV.
    With Online Mode you provide your basic information like name, address, date of birth & upload scans of PAN card and Address Proof. And for IPV you will have to complete a video call holding original PAN card and address proof. There’s also Aadhaar based eKYC where you can simplify the online KYC procedure by entering and authenticating the Aadhaar number. This is because all your information is already available in the UIDAI database. But, if you choose the Aadhar based eKYC method, there is a limitation that you are not allowed to invest more than ₹50,000 in one fund house during a financial year.
  • Deciding the category of fund: There are many different types of fund categories to choose from like Debt Funds, Equity Funds, Balanced Funds etc. The deciding factor depends on your risk profile. Conservative investors should choose debt funds, moderate investors can select balanced funds, aggressive investors go for an equity fund, and so on.

    Equity Funds invest your money in company shares. If you see the allocation of your chosen equity fund scheme you will see that they have invested 3% in Infosys Ltd., 2% in HDFC Bank Ltd. etc. Debt Funds invest in debt instruments. They offer lower returns than equity funds but are much more stable and are not affected by the highs and lows of the share market. Balanced funds are a mixture of both so they provide stability in the form of debt and high returns from the equity portion.

    It also depends on your goal period. Investing for short term goals? Go for debt funds. Investing for long term goals? Go for equity funds. And so on. Visit Moneycontrol or Value Research to know more about your chosen fund.

  • Finding the correct scheme: Once you have decided the category of fund, you have to choose from multiple schemes available under your selected category. Your choice should be based on the following factors. (you can get these details on most mutual fund data websites) :
    Exit Load: What are the charges deducted when you withdraw or redeem the units from the scheme? Most funds have NIL load after one year so if you try to cash out after one year they will not deduct anything from your earnings.
    Age of Scheme: It is always better to select a scheme which has undergone all the market cycles like bull, bear or stagnant. This will show that the scheme can stand under the pressure of the volatile market.
    Past Performance: Although past performance is not an indicator for future performance it is still advisable to check this to evaluate the consistency of scheme. That is if a scheme has consistently outperformed the set benchmark or not, has it performed better than its peer group or not etc.
  • Dividend or Growth: After selecting the scheme you need to choose the scheme option (the type of return) either dividend or growth.
    Dividend Option – Payout/Reinvestment. These pay periodically to investors from the profit earned by the scheme as and when payable (not mandatory and not paid regularly).
    Growth Option – Capital appreciation. Profits are not distributed via dividends but are added back to schemes, making its NAV grow. With these two, your scheme has been further divided and if you’re investing directly you will have to choose from Direct Dividend or Direct Growth.
  • Mode of Investment:  You can either go for Lump-sum or Systematic Investment Plan (SIP). This choice should be based on your financial capabilities. Under a SIP a fixed sum is debited from your bank account every month (after your authorization, of course) and invested into the mutual fund scheme of your choice. SIPs are best suited for salaried employees with a regular income.
  • Offline or Online: Once you have made all the choices you can choose to complete the investment process offline or online based on your convenience.
    Offline – Procure the relevant application forms. Fill it accordingly, attach the copies of required documents and cheque drawn in favour of the scheme with it. Submit the entire set at the point of acceptance. You can submit the documents to a fund house or an intermediary or at KARVY’s or CAMS’ office. KARVY has tied-up with some fund houses while CAMS has tied-up with others.
    Online – Visit the website of the fund house and follow the steps for online payment. This includes the creation of an account (optional at some sites), filling of a simple form, giving bank details and making payment via NEFT, RTGS or net banking.

Congratulations, you just completed the process of mutual fund investment! Remember to diversify your investment. Never settle for just one scheme or one category. This would make you overly dependent on it. And if it goes down, your entire investment goes down. Instead, diversify by selecting more schemes from varied categories to spread the risk.

Do not forget to review your portfolio from time to time to make sure it’s still in sync with your investment goal. Happy Investing!

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