In the words of Seth Karlman, the legendary investor, “Investing lies at the intersection of economics and psychology”. Economics – the valuation of business is not hard. The hardest is the psychology part, in which you have to decide how much you should buy, whether you should buy it at a certain price or wait for a lower price. In a nutshell, Karlman rightly views investing as a field where “net present value meets greed and fear”.
If something perfectly fits Karlman’s description of investing, that is none other than a mutual fund. A mutual fund is an investment instrument, which is made up of a pool of funds contributed by many investors for the purpose of investing in stocks, bonds, money market instruments and similar assets. Mutual funds are handled by professional money managers. They attempt to produce capital gains and income for the investors of the funds.
If you are looking for ways to grow your hard-earned money, a mutual fund investment is the most reliable and highly profitable option. Mutual funds can help you make money beyond expectations. So, if you are seriously thinking about investing, you must learn how to invest in mutual funds.
How to Invest in Mutual funds
The following is a step by step guide to investing in mutual funds in India.
1. Be KYC Compliant
To start investing in mutual funds, the first step is to start completing the KYC. Being KYC compliant is a one-time process, which is essential for investing in mutual funds in India. Documents required for KYC include: PAN card Copy, your recent passport size photograph and the proof of your address along with the application form.
2. Select the Right Asset Class
Once you have completed your KYC, you need to figure out the right asset class according to your risk appetite. You can invest either in equities or in bonds or in balanced funds or you can choose more than one asset classes. The level of risk you undertake to generate expected returns will decide which category you should pick or avoid while selecting the asset classes. You should also decide the tenure of your investment.
3. Choose the Right Funds
While investing in mutual funds in India, the most important part is shortlisting and selecting the right fund. Once you have done the proper research regarding the asset allocation that best suits your needs and goals, the next step is to look and compare different mutual funds on the basis of their performance history as well as their investment philosophy. Choose the one that matches your objectives.
One should not invest their entire portfolio in just one asset class. Diversifying the investment in various asset classes is important to reduce the risk and mitigate the possibility of making any loss if one asset class doesn’t perform. Large cap funds are generally safer than small cap funds. Hence, it is recommended to invest in small cap funds with long term horizon of 5 years or more for higher returns.
5. Tracking Your Investments
Keeping a track of performance of your investments is as important as deciding where to invest. Markets are dynamic and are subject to constant changes. Hence, it is important to keep a track of the funds you have invested in, even if they are managed by top-notch advisors and asset managers.
Types of Mutual Funds
Before we jump to a step by step guide to mutual fund investment, let’s learn about different types of mutual funds.
1. Equity Mutual Fund
If you choose to invest in equities, all your money gets invested in stock markets and you get the returns depending on the performance of the market. In the long run, equities give higher returns than any other form of investment. However, equities are only suitable for those who have a high risk appetite.
2. Debt Mutual Funds
In debt mutual funds, all your money gets invested in debt instruments such as Government bonds and fixed income investments. Debt funds ensure fixed rate of returns to an extent. Though it is less volatile and less risky, they offer less return than equities.
3. Balanced Mutual Funds
A combination of equity and debt, a balanced mutual fund offers the best of both worlds. A part of your fund will be invested in equities and part in debts, thus ensuring a certain percentage of return after a period of time. If your risk appetite is neither too high nor too low, balanced mutual funds are best for you.
Mutual fund investments, if done in a disciplined manner and with good knowledge of market timing, it can give you more than your expected returns in the long run. Now that you know how to invest in mutual funds, the next step is to do is start doing your own research and find a reliable mutual fund company to start your investments. The earlier you start investing and the longer you stay invested will guarantee a higher return on your investment.