Whether you are a seasoned investor or just starting, understanding how mutual funds work is essential to making informed investment decisions. Mutual funds offer a range of benefits such as diversification, professional fund management, liquidity, Wealth Creation and more.

Thats the reason, mutual funds are highly prefereable investment avenue which can help you reach your financial objectives.

mutual funds provide access to a diversified portfolio of stocks, bonds, and other securities. This diversification spreads the risk, making mutual funds a smart choice for long-term investment growth.

What is a Mutual Fund?

A Mutual Fund is an investment scheme where people pool money (just like other investments). This money is invested (on your behalf) in stocks, bonds or other securities ( depending on the scheme objective).

For example, the equity-based Large cap mutual fund will invest money in Large cap stocks, whereas Short Term Debt mutual funds will invest in short-term debt securities.

 These investments can be used for various investment requirements such as financial goals ( retirement, child education, purchase of asset, home etc.), short term money parking, fixed maturity plans, regular income, tax saving and wealth creation.

 There are numerous benefits of investing in mutual funds, like flexibility to choose your investment, low investment amount etc. (we will discuss it later in the post).

Are all Mutual Fund Scheme same?

Before we move further and explore different thing about mutual funds, it is very crucial to understand here, that there are various kind of mutual fund schemes.

OK, understand it like this.

If we talk about outfits we wear on. The outfit can be a salwar kameez, kurta pajama, coat pant, shirt, frock or some other garment.

Or else

If we talk about vehicles then various kinds of vehicles come under the category of vehicle.

The vehicle may be Rickshaw, auto rickshaw, car, bicycle, airplane, truck or any other sort of vehicle.

  Likewise mutual funds are also divided into various categories, depending on the type of security, it is investing into.

Types of Funds:

Mutual Funds are broadly categorized into

 Equity Mutual Funds – 

Equity mutual funds invests more than 80% of its money in shares of companies. Depending on market capitalization of these companies mutual funds are further divided into large cap, mid cap and small cap mutual funds.

Debt Mutual Funds –

Debt mutual funds invests money in bonds, debentures and money market instruments.

There are different kind of debt funds based on duration, risk and type of investments.

 Who starts Mutual Fund Schemes

Financial Institutions (such as HDFC, ICICI Prudential, and Franklin Templeton) or companies register themselves with SEBI to start mutual fund schemes in India.

This registration ensures legal binding of companies with respect to the laws and other regulations.

Thus, AMC (Asset Management Company), who works as a trust, floats a mutual fund scheme in market.

Note: The Asset Management Company works as a trustee.

This ensures safety of money in a sense, that no one can take advantage of your money.

How does Mutual Fund Works

You invest your money in mutual fund scheme.

The AMC appoints a professional fund manager to manage the invested money.

The Fund Manager along with his team manages your money and invests this money in shares, bonds or money market instrument based on scheme objective (type of scheme).

 The fund house charges a small nominal fee from all investors called as expense ratio.

This expense ratio is the fee to manage your portfolio.

 You make money from capital appreciation or dividend or interest paid from your invested money.

How to invest in Mutual Fund

 There are two ways through which you can invest in mutual fund.

•         One Time/ Lump sum Investment
•         SIP

  You can choose lump sum investment or SIP investment as per your cash flow.

Lump sum investment

You can invest your money one time through lump sum investment option.[Tweet “Click to tweet”]

In this you need to deposit common application form and KYC form (link and detail given below) and a cheque.

You can start Lump Sum investment with as low as Rs 5000.

However, some mutual fund accepts Rs 10000 as minimum investment.

You can make subsequent investment in the same fund or different fund whenever you wish to.

For example Mr. Sunil invested Rs 10000 in a mutual fund scheme in Dec 2018.

After few months he wish to invest another Rs 10K in same fund and later in the year end want to start SIP in same fund.

So, mutual fund offers lot of flexibility with respect to your investment. 

Even, you can start a SIP in same fund if you wish to.

That means you can invest in both ways in the same scheme, if you wish to.

SIP Investment:

SIP stands for Systematic Investment Plan in which you have to pay a fixed amount (you choose amount) each month or each period (you choose).

If you do not want to invest lump sum amount then you can start your investment periodically (say monthly) than SIP is the best option for you to invest in mutual fund.[Tweet “tweet”]

You can start SIP with as low as Rs 500.

Some mutual fund even offers Rs 100 as minimum amount.

This flexibility is an added advantage for people who cannot invest high amount due to varied reasons and thus make investment possible for everyone.

You can choose your own payment frequency.

The Frequency can be monthly, quarterly half yearly or yearly (even weekly mode is also available)

Frequency can be chosen as per your own needs, requirements and cash flow basis.

However monthly mode is highly preferred one in India.This may  be due to monthly payment mode in India.

Lump Sum & SIP in same Fund simultaneously 

If you want, you can choose the both options at once also.

You can invest lump sum amount and SIP in same fund.

Otherwise you can choose a new fund also and invest as per your requirement.

  How to begin your investment

   Firstly you need to submit an investment application form* along with KYC form (know your customer).

* Investment form is commonly known as common application form.

KYC is the onetime pre-requisite for investing in mutual fund investment.

 KYC form is a simple two pages form in which you have to paste your photo (sign underneath the photo) and write your basic details such as your name, PAN card number, Aadhar number, your home address, your age etc.

All documents should be attested from a gazetted officer or your broker or ARN holder or Managerial category employee of AMC.

  You also need to submit common application form to the AMC along with a cheque. 

So if you are investing for the very first time, than

you need to deposit common application form,

KYC Form (your photo on form),

Your attested documents (PAN card, Address proof etc.)

cheque.

In case you wish to start a SIP, a SIP form is an additional requirement.

 Lump Sum or SIP, Which is better

 People often ask lump sum or SIP which will be better for them.

Here I would like to say that both are equally good options.

How you invest your money should depend on nature of your cash flow.

 Watch our video to know which is better for you.

Why you should invest in mutual funds

There are multiple good reasons about why should you invest in mutual funds. Few are listed below:

• Low Initial investment – you can start investing with as low as Rs 500 each month. The minimum investment is Rs.5000 if you want to invest one time.( some funds have minimum investment of Rs 10K )

 There is no maximum limit of investment in mutual funds.

• Professional management – An experienced qualified professional manages your money in mutual funds.

Therefore whether you invest Rs. 500 or 500000 your money is managed professionally.

• Convenience -You can invest your money, redeem your mutual fund units, stop your SIP investment or continue your SIP while redeeming the previously invested amount. 

Thus mutual funds offer you great convenience of investing.

• Liquidity –

Mutual Funds are highly liquid in nature (except close ended funds-you can withdraw after a fixed duration).Liquidity here means that you can withdraw your money anytime from mutual fund investment.

Even partial withdrawal is also possible (redemption is subject to exit loads).

 For an example: suppose you are running a SIP of Rs. 5000 and after 2 years you require 50000 from your investment.

You can withdraw your 50,000 amount and still continue with your SIP

• Diversification– Mutual fund offers high diversification because even a single Mutual Fund invests across 60 -70 stocks or securities.

This approach reduces risk of your investment.

Say if you had invested in a stock or a security than at maximum you will buy 5-10 stocks and if the market crashes than you will possess higher risk as compared to mutual fund scheme.

• Tax benefit – You can invest in tax saving mutual fund (ELSS – Equity Linked Saving Scheme).

  Taxation is also lower in mutual funds as compared to other investment options.

• Regulation:  Mutual Funds are well regulated investment option with high transparency.

SEBI (Security and Exchange Board of India) is the regulating body for mutual funds.

 All mutual funds are required to follow the norms, as laid down by SEBI.

These norms are amended from time to time .Thus ensuring protection of investors’ interest. 

Mutual fund work under strict regulations from Security Exchange Board of India and thus makes it further better for you.

Things to Consider as a first time investor

1. Fix an investment goal

  Fix an investment goal and save better.

If you know the destination, than reaching the destination is easier and faster as compared to reaching to an unknown destination.

Consider watching

2. Know your Investment duration-

If you know your duration than you’ll be able to choose which kind of funds you should invest in.

It is very crucial to understand your duration or otherwise you may book loses in future.

Where to invest for Long Term & Short Term || Where should I Invest my money

• https://www.youtube.com/watch?v=hgfB_ipqdh8&t=5s

Because, if you choose wrong fund as per duration than you might lose your money on account of interest, exit loads and taxation.

3. Risk Taking Capacity – Risk taking capacity depends on many factors such as your age, your cash flow nature, your financial liabilities, and your duration and market outlook.

If your duration is long then you can go for equity mutual funds and take higher risk in your investments while if you duration is low then you can choose funds as per that. 

4. The amount of money you need to invest – linking investments

with your life future financial goals will help you to understand how much money you need to invest for your financial goal.

It also lays down the ways by which you can achieve your financial goal.

5. Diversification- diversification means that you spread your investments across various categories of schemes.

Diversification here also mean that you need to you divide your money between three -five funds.

 This strategy saves you from market volatility as all funds will not move in same direction in case of market turbulence.

6. Emergency fund:

In my view it is the most important and essential part before investing.

Keep a separate emergency or contingency fund.

This is people tend to redeem their money before their stated duration because of some urgent need and thus losing the benefit of compounding.

Have you ever heard people saying ………You know, I have burnt my fingers investing into MF.

Let’s discuss a short storey of Madhu

Madhu, once invested her money in equity mutual fund thinking of long term (say 5 year) bur after two year she required money for some urgent requirement.

She required money badly at that time and therefore she liquidated all her long term investments and incurred huge losses.

Since then, she kept on saying that ….

 I do not invest in mutual fund because on I had burnt my fingers while investing in mutual funds.

Can you guess why this happened?

This is only due to the reason that she had invested her money for long term but due to unforeseen reasons she had to liquidate her investment.

7. Choose right fund-Choose right fund as per your investing duration, risk appetite, investing horizon and your risk profile.

Please know more about the duration please WATCH OUR video.

8. Financial Plan-

If you invest as per your financial plan than you can get best out of your invested money.

 A Financial Plan makes your money work rather than you work for the money day and night.

 Basically it lays out a road map for your investment and your financial goal.

 The main objective is to make your money work and help you to reach your financial goals faster.

 It also lays out various strategies options for you to reach your destination.

9. Portfolio Review-Portfolio Review adds lifeline of your investments.

As you know market is dynamic in nature so is your investment.

 Funds performance keeps on changing from time to time. The future performance of a fund keeps on changing with the dynamics of market and economy.

The today’s best may not remain best tomorrow. Therefore, the changing dynamics makes it essential to have a regular portfolio review at least once in a six month time.

 Your portfolio remains in good health if you say yes to portfolio review.

10. Seek advice from a Financial Planner:  First time investor used to make mistakes while investing your money.

 It is advisable that you consult Certified Financial Planner to get your investments planned well.

 What return should you expect from your investments

In my experience you should keep your expectations to 12% for a diversified portfolio in long run.

However if you choose Liquid mutual Fund or a debt fund you may get somewhere around 7%-9% from your investments.

When should you exit from your investments?

As I explained earlier in this post that you should link your investments with your life goals.

In line to the above fact, you should exit when your financial goal approaches.

consider watching video

When to Exit Mutual Fund || How Long Should I Stay Invested in Mutual Fund

 How to redeem/sell/exit mutual Fund investment

Redemption is a simple process. You have to deposit redemption request in the respective AMC and you will get your redemption proceed in your bank account.

To know about the detailed procedure, please watch our video on same.

How to Withdraw/Redeem/Exit Money from Mutual Fund|| How to Sell Mutual Funds Online

Conclusion

I hope this detailed post about mutual fund will help you understand mutual funds. I would like to hear from you.

Which strategy from this post are you going to try first?

Or maybe I didn’t mention one of your favorite financial tips. Either way, let me know by leaving a comment below right now.