How to invest in mutual funds? When to invest and which funds to invest is the often asked question. I've tried to address the questions of mutual fund investors, who are just beginning their mutual fund investments.
What does a mutual fund
actually do?
A mutual fund gathers money from investors and parks this money into investments that an investor wants.
So, if SBI Mutual Fund initially comes-up with an open ended equity scheme, then the money that it gathers from investors for this scheme is automatically invested in equity shares.
So, the units which were issued at Rs 10, would start going up if shares prices rally. As this happens the net asset value of the units, which started at near Rs 10, start rising. So, it goes goes up from Rs 10 to say Rs 11. The investor who bought the units at Rs 10 can sell it back to the mutual fund at Rs 11. Now, since this is an open ended scheme the mutual fund can sell units continuously at the net asset value. So, a new investor who did not originally buy at Rs 10, can now buy at Rs 11.
What you need to begin investing in mutual funds?
To begin investing, the first thing you need to do is to be "KYC compliant". This is nothing but a submission of your address proof, photographs, date of birth proof and definitely your PAN card.
You can directly approach brokers for investing in mutual funds or can directly approach the mutual fund house. As mentioned earlier, you can either consider an equity mutual fund or a debt mutual fund.
It is important to remember that you have to update your KYC each time you change your address. This is important to stay updated.
What are the Type of mutual funds that you can invest in?
Now, if you are a young investor, you could start investing in a host of mutual fund schemes. If you have just started your career, you can invest in equity related mutual funds, which put bulk of their money, as high as 80 per cent in shares.
These are risky. They not only give you high returns, but, you can also lose money. In the long term though, they have given superior returns than most bank deposits. Now, young investors can go for these schemes as they have the ability to take risks.
For individuals who are in their 50s and 60s the right way would be to go in for debt related mutual funds. So, debt related mutual funds, unlike equity mutual funds, they out their money in safe instruments like government securities. For medium risk investors, they can choose balanced funds, which put a little money in equities and little in debt.
The type of returns that you can get from mutual funds
There are two types of returns that you can get from a mutual fund. One is the capital appreciation and the other is dividends. So, when you invest, you have to choose either a dividend plan or a growth plan.
Under the growth plan the money is not distributed like dividends, but is added back and the scheme grows. Let us give you an example. Say you start investing in a mutual fund at a price of Rs 10. If you take a dividend, then your NAV will hardly move, because the mutual fund has distributed the profit.
On the other hand, in growth plan the dividend gets added back and the plan grows. So, if you started investing at Rs 10, you would probably see an NAV of Rs 16 in some years. This means you can sell the units at a price of Rs 16.
How are returns from mutual funds taxed in India? Beginners to investing in mutual funds, should know how to save tax. As mentioned in the article, you can either opt for growth or dividend distribution. Under the dividend distribution plan the dividends earned by the investor is tax free in the hands of the investor.
In fact, this is same like equity shares where dividends are tax free, up to a sum of Rs 10 lakhs. On the other hand if you go in for the growth plan, there is a capital gains that applies on the units that are sold at a profit. Hence, it is always advisable to take a look at the option of dividend distribution.
There is no tax liability on equity mutual funds, if the same is sold before one year. However, there would be a tax of 15 per cent if you sell your equity mutual fund before a period of one year.
A list of mutual funds in India Beginners to investing in mutual funds most know the various big mutual funds in India. Most of the equity mutual funds give good returns when the markets are climbing. There are many mutual funds in India.
Some of the top Mutual Funds are SBI Mutual Fund, Reliance Mutual Fund, HDFC Mutual Fund, ICICI Prudential, Birla Sunlife, Quantum Mutual Fund, DSP Black Rock Mutual Fund, Franklyn India etc. Each fund runs a very wide range of mutual fund scheme, that investors can choose from.
The type of scheme that you choose varies with your age and ability to take risk.
Important terms that you should know in a mutual fund
As an investor you should know some of the popular mutual fund terms that are used. Some of these include expense ratio, NAV and exit load.
Expense ratio: This ratio is nothing but the expenses that a mutual fund house incurs on advertising and selling, administrative costs to manage the fund etc. This is deducted from the investors returns.
Exit load: This is nothing but the amount that charges that are levied if you sell the units of a fund before the stipulated time. It is generally 1% of the NAV if you sell before six months.
NAV: The net asset value is the rate at which an investor, buys and sell the units of a mutual fund.
SIP and SWP: These two terms are the systematic investment plan and the systematic withdrawal plan.
What to look for before investing in a mutual fund?
If you are a beginner are looking to invest in equity funds, it is best to seek some professional advise. As for those who have some knowledge it is a good time to look at the expense ratio, exit ratio, past track record and whether the markets have really rallied and you are buying the fund at an extremely high price to earnings ratio. If the equity markets have rallied it maybe time to wait for some more time, before parking a lumpsum amount in equity mutual funds. Remember, returns from equity mutual funds are largely determined by how stock markets move. So, if prices are high, you might want to take a breather for some time, before starting to invest.
The SIP route to invest in mutual funds
You may have so often heard the term Systematic Investment Plan or SIP. Why should beginners to mutual fund use this route? Say you invest a lumpsum in equity mutual funds and the stock markets crash. Your NAV of the fund would crash and hence you might incur huge capital losses.
Now in SIP you could invest small amounts from your monthly salary, which will get deducted from your bank account every month. So, if in the first month you bought a little and the index crashes, next month you are buying some more at a lower cost and reducing your average cost. On the other hand if markets rise, you have already bought at lower prices. In short, it is one of the best ways to take spread your risk and today is the most popular means of investing.
Similarly, when you want to withdraw the money you can opt for the systematic withdrawal plan. So, you have an option for depositing and withdrawing through the mutual fund route.
When to withdraw your money?
You can withdraw your money from equity funds, when you believe that your objective has now been met. You can also withdraw your money from mutual funds, if you believe that the fund has performed poorly and it is time to shift schemes. By and large, if you are tracking markets, you know when to withdraw if markets have got overheated. Remember, it would be more prudent to consult some experts who have knowledge, if you yourself lack the knowledge. You can gradually also make a move to some of the debt scheme of the same mutual fund house or another mutual fund house.
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