How to Invest in Mutual Funds

Investment in mutual funds is a popular choice with investors because of its simplicity, diversification benefit, and the potential for long-term returns. Wondering how to invest in mutual funds? You’re at the right place. Here, we’ll walk you through everything you need to know, from knowing how to start investing in mutual funds to choosing the right fund to making your first investment.

How to Choose the Right Mutual Fund?

Before investing, you should be aware of how to select the appropriate mutual fund. Here are some factors to take into consideration:

• Investment Goals

Are you investing for short-term gains, long-term wealth creation, or retirement? Your goal will determine whether you should choose equity, debt, or hybrid funds.

• Risk Appetite

Equity funds come with higher risks but potentially higher returns, while debt funds are more stable. Hybrid funds balance both.

• Fund Performance

Look at the fund’s historical performance over 3-5 years. While past performance doesn't guarantee future returns, it provides insights.

• Expense Ratio

This is the annual fee that fund houses charge. A lower expense ratio means more returns in your pocket.

• Fund Manager’s Expertise

A skilled fund manager can make strategic decisions that improve returns.

• Tax Implications

Some funds offer tax benefits up to ₹1.5 lakh under Section 80C, such as ELSS (Equity Linked Savings Schemes).

• Investment Horizon

For short-term goals (1-3 years), consider debt funds. For long-term goals (5+ years), equity funds may be better.

Why Should You Invest in Mutual Funds?

Understanding the reasons to invest helps you stay motivated. Here’s why you should invest in mutual funds:

Different Ways of Investing in Mutual Funds

If you’re wondering what is the best way to invest in mutual funds, there are several methods to consider:

1. Direct Plan Investment: Invest directly through the AMC (Asset Management Company) website or brokerages offering Direct mutual fund plans like FYERS. It offers higher returns as there are no distributor commissions.

2. Regular Plan Investment: Invest via brokers, financial advisors, or third-party platforms. While it may come with additional fees, it offers professional guidance.

3. Through Banks or Financial Institutions: Many banks offer mutual fund investment through their apps or in physical form.

4. Online Investment Platforms: These platforms provide comparisons, reviews, and easy online investment options.

Other ways of investing in mutual funds

Based on the amount of investment you have in hand, you can invest in mutual funds in the following ways.

• SIP (Systematic Investment Plan): The best way to invest in mutual funds for beginners, SIP allows you to invest a fixed amount regularly, promoting disciplined investing.
• Lump Sum Investment: Ideal if you have a large sum to invest at once.

Steps to Invest in Mutual Funds

Here are the steps to invest in mutual funds:

1. Define your investment objectives and timeline clearly.

2. Submit KYC (Know Your Customer) documents, either online or offline, as it is mandatory.

3. Choose a suitable mutual fund based on your risk profile, investment horizon, and goals.

4. Decide between SIP or lump sum as your preferred investment mode.

5. Sign up with an AMC or an online platform to register and open an account.

6. Complete the payment process to make your first investment.

7. Review the fund’s performance regularly and rebalance your portfolio if necessary.

How Can NRIs Invest in Mutual Funds?

Non-Resident Indians (NRIs) can invest in mutual funds in India by following a process similar to resident investors, with a few additional requirements. 

• The first step is to open an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) account in India, which will be used for fund transactions. 

• Completing KYC (Know Your Customer) compliance is mandatory. 

• Documentation such as passport copies, overseas address proof, and a FATCA (Foreign Account Tax Compliance Act) declaration is required in the case of NRIs from certain countries.

• NRIs as an option can invest in repatriable investments (money to be remitted outside) or non-repatriable investments (money remains in India). 

NRI investments in mutual funds can be made with SIPs or lump sum, according to one's preference. 

Taxation rules applicable to NRIs are slightly different. The capital gains from mutual funds are subject to TDS (Tax Deducted at Source). NRIs from some countries can also have restrictions and hence one must verify eligibility depending on the country of residence.

Advantages of Investing in Mutual Fund

When compared to investment schemes such as fixed deposits, stock, or real estate, mutual funds have some advantages. Let's see how the benefits of mutual fund investment are different:

• Higher Liquidity: Unlike fixed deposits, mutual funds (especially open-ended ones) allow for easy redemption without heavy penalties.

• Diversification with Less Capital: Unlike direct stock investments that require substantial capital for diversification, mutual funds spread investments across multiple assets even with small contributions.

• Professional Management at Lower Costs: Compared to portfolio management services, mutual funds give you access to professional fund managers at a fraction of the cost.

• Flexibility in Investment Amount: Unlike real estate, which requires substantial initial investment, mutual funds can be started with as little as ₹500 through SIPs.

• Increased Tax Efficiency: Mutual funds such as ELSS provide tax relief under Section 80C, as opposed to most other conventional investment avenues.

• Less Risk compared to Direct Equity: Mutual funds are professionally managed, and they diversify the portfolio to reduce the risks, whereas direct stock investment can involve greater risks for the investors.

• Convenience and Accessibility: Mutual funds are convenient and easily accessible via SIP and online platforms versus investing in gold or property.

Conclusion

Now that you know how to invest in mutual funds, you can proceed with your investment process confidently. By learning how to begin investing in mutual funds, choosing the right funds, and how to invest in mutual funds best, you are paving the way for possible financial gains. Mutual funds comes across as a great avenue to build wealth in India even for NRIs.

Invest carefully, stick to your goals, and check on your investments periodically. Mutual funds are a dynamic and effective vehicle and if utilised prudently, they can help you achieve your financial goals.