Investing Fundamentals

How to invest in mutual funds in India: A Beginner’s Guide

Mutual Funds Sahi Hai’ – probably the most popular tagline these days, isn’t it?

This ad campaign from AMFI (Association of Mutual Funds of India) has really delivered in terms of attracting the Fixed Deposit and Real Estate Junta toward mutual funds as investment instruments in a pretty convincing manner. However, what hasn’t been made amply clear is if someone wants to explore this investment instrument, how exactly does he or she get started? All you need is a PAN card, a bank account and this blog.

Here’s a pictorial depiction of the concept of a mutual fund anyway –

How Mutual Fund Works

Moving on, here’s how you invest in mutual funds in India –

Define your investment goals

This is the first step and most of you have identified this already. However, it’s time to define it. You should you know at least three things about your investment goal –

  1. The purpose (why do you want to invest in mutual funds?)
  2. The timeline (how far away is the investment goal from today?)
  3. The expectation (how much money you require to achieve the financial goal?)

So, if you started with – I want to invest for my daughter’s education

You should be able to put it as follow – I want to invest for 10 years for my daughter’s education. In today’s value, I will need about Rs. 10 Lakhs to achieve this investment goal

More examples –

If you started with – I want to invest to create a corpus for my retirement

Put it as follows – I want to invest until retirement (for example – 20 years from today) for my retirement. I need to build a corpus that lets me continue my current lifestyle for 25 years post retirement. My current steady state monthly expense is Rs. 75,000

If you started with – I want to invest for my wedding

Put it as follows – I want to invest for my wedding which is 18 months away. I have already saved enough although I want to earn little more than 4% which is interest rate of my savings bank account. This investment needs to carry zero oror minimal risk

You’d be surprised to know the length and breadth of financial goals mutual funds can help you achieve.

For example – Did you know mutual fund investments can help you generate a regular cash flow?

How does this defining of investment goals help? help Defining your investment goals is the starting point of the whole exercise of investing in mutual funds. A tightly defined investment goal helps keep things organized and chalk out a plan.

Choosing an advisor/platform

Although not necessary, it is highly recommended that you talk to an investment expert before you begin to invest in mutual funds in India especially so when you are reading a beginner’s guide to invest in mutual funds in India. Since you are reading a beginner’s guide on how to invest in mutual funds in India, I would strongly recommend to start with an advisor (an investment expert) rather than trying to do it yourself.

Not only will he be able to understand your investment goals better better, but will also try to complete the picture by understanding your current financial position and tell you whether your financial goals require any tweaking. He will also assess your apparent risk appetite and accordingly give you a plan that carries suitable volatility. Additionally, he will further guide you to complete the paperwork necessary to actually start to invest in mutual funds in India.

However, advisor hunting is not a very simple task. Always select someone basis their track record and ability to answer your doubts comprehensively.

Robo advisory is becoming increasingly popular. However, not everyone who helps you sell and buy mutual funds online is a robo advisor. Finpeg is one such robo advisor which goes beyond its role of being a mere mutual fund distributor and offers some unique investment mechanisms and solutions along with cutting edge investment advisory.

Direct Funds versus Regular Funds

Before you move on to choosing an advisor/platform, a word of caution.

If someone is offering his services free of cost, he is most likely to be a mutual fund distributor rather an advisor. This entity earns a commission for selling you regular mutual funds. This commission will more often than not hurt your take-home returns from your mutual fund investment.

If someone is offering his services for a fee (one time or recurring), he is most likely to be a mutual fund advisor and not a distributor and hence will recommend you direct mutual funds.

Please note that there are some platforms which let you invest in direct funds for zero fee – they are, however, not genuine advisors but mere facilitators.

Let’s have a look at an example of how your investments would perform when you invest in direct and regular funds –

The investment amount is Rs. 1 Lakh to be invested into an equity mutual fund for the next 15 years.

Over a 15 year period, a mutual fund distributor (regular funds seller) pockets about Rs. 75,000 just for naming a fund or two and filling up a couple of forms for you at the start. On the other hand, an investment advisor (direct funds seller) would have charged you about Rs. 1,000 for a session of consulting or advisory and even if you consulted him every other year – to check if everything is on track – you would spend not more than Rs. 20,000 for these these consulting sessions over the 15 year tenure.

So, when the advisory is at par forfor a mutual fund distributor and an investment advisor it is always advisable to go ahead with the investment advisor UNLESS the mutual fund distributor can prove to you that he can not only offset his commission but also give an extra kick to your investments by actively managing your money like Finpeg does. Here’s how –

Please note that there’s nothing called Finpeg version of mutual funds, rather at Finpeg we execute some investment mechanisms/algorithms on your money for it to perform remarkablyremarkably better than traditional mutual fund investment mechanisms (like SIP, lumpsum, STP etc) used to invest in mutual funds in India.

Also, please note that the numbers in these tables are only indicative. They may not be accurate but do convey a point directionally.

To learn more about what is responsible for this difference in regular and direct versions, please read this article.

Getting the Mutual Fund Investments Started

Once you have chosen a financial advisor/platform and got all the documentation (KYC, account creation etc) done, next comes actually starting to invest in mutual funds in India.

On a side note, your chosen advisor/platform should make the entire documentation process completely seamless and as much paperless as possible. Ideally, paperwork should the last of your worries when planning to invest in mutual funds in India.

On a side note, your chosen financial advisor/platform should make the entire documentation process completely seamless and as much paperless as possible. Ideally, paperwork should be the last thing you should worry about when planning to invest in mutual funds in India.

The plan, funds, investment mechanism and everything else also should  also be taken care of by the advisor if you are going to appoint an investment advisor. But since you are reading this blog, you would still want to know.

But since you are reading this blog, we think you’d still want to know.

So, here’s a quick mutual fund 101…

Mutual Fund Categories

It is important to know about the basic mutual fund categories and how a particular type of mutual fund could be utilize –

Debt Mutual Funds

Debt mutual funds is the relatively safer category of mutual funds. They are not related to the stock market which makes them way less volatile than equity mutual funds.

However, since you are not taking on a lot of risk, you cannot expect a lot of reward. Which is why debt mutual funds, although much safer than equity mutual funds, yield, on an average, a much lower return than equity mutual funds – approximately around the prevailing returns of fixed deposits. Think of debt mutual funds as open ended fixed deposits with taxation advantages if you stay invested for 3 years or more.

There are many categories of debt mutual funds where you can gun for higher-than-FD returns but you would end up taking much more risk. Moreover, covering different types of debt mutual fund is beyond the scope of this blog and will only end up confusing you.

So let’s try to keep it simple!

There are multiple sub-categories under debt mutual funds where you can gun for higher-than-FD returns but those come with their fair share of risk. Moreover, covering various debt mutual fund sub-categories not only goes beyond the scope of this particular piece but also might end up confusing you!

So, let’s keep it simple and move on…

Debt mutual funds are mostly used either in tandem with equity mutual funds for medium term (3-5 years) and long term (5 years and above) investment goals or independently for short term investment goals (1-36 months).

Tip – You can park your short term cash requirement in liquid funds. As the name suggests, liquid funds are extremely liquid. The benefit? A higher rate of return than your savings bank account and almost the same liquidity – it takes 1 working day for the money to be credited back to your bank account.

Equity Mutual Funds

This is the category of mutual funds that used to (still does, however, a bit less) scare new investors because the performance of equity mutual funds is strongly correlated with the stock market. And stock market is perceived (not that it isn’t) as a dangerous place to invest money.

However, the apparent notion is if you invest in equity mutual funds for the long term, you come out with an equity level return (12-14%) always. Our analysis proves otherwise.

So, if you’re going to be investing in equity mutual funds, you need to understand the degree of risk involved. And never invest in equity mutual funds for short term.

Mutual Fund Investment Mechanisms

This involves determining the most appropriate investment mechanism for your money. Again, this could be broadly answered as follows –

Mutual Fund Strategy Selection

Fact – Did you know that investing via SIP (the most prominent and trusted mutual fund mechanism in India) even in a top-rated equity mutual fund can yield you negative returns? Learn how Finpeg Alpha SIP can almost completely eliminate the possibility of you losing your money.

Feel free to post any questions/comments you may have in the comments section 😊

PS – For NRIs to be able to invest in mutual funds in India, the process is pretty much the same as above. However, an additional requirement is an NRE/NRO bank account!

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Anurag Bhalerao

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