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How to invest in mutual funds: A beginner's guide

Last updated on: May 18, 2019 09:11 IST

While investing in mutual funds, it is essential that you focus on the turnover rate percentage of a mutual fund, which is bought and sold every year, says Naval Goel.
Illustration by Dominic Xavier/Rediff.com

How to invest in mutual funds

If you are a beginner to mutual fund investment, then the first and the most important things you should do is to know what mutual funds actually mean.

Mutual funds are investment platforms for investors who want to spend an amount of their income and achieve financial goals through investing in various assets such a debt fund, liquid assets and gain reward for the same.

Registered with SEBI (Securities and Exchange Boards of India), mutual funds collect money from investors and then invest it further with the context of investors.

Now, if you have made the decision to invest in mutual funds, but do not know how to get started to avoid any loss, then you need to be a bit more aware than you are.

Once you have understood the basic concepts and market terms, you will be half way there to reach your objectives.

Also, if you are a beginner, you should research as much as possible to decide where should you invest.

Here are some useful tips to consider before investing in mutual funds for the first time:

What are your goals?

When it comes to the financial investment, they should always make sense with your financial goals, situations and ability to handle the risks.

So, you need to start with the overall research into each category and criteria so that you can create a specific strategy and goal. Get deeper into the MF schemes, and decide what you want to achieve with the investment.

Understand the risk

Once you know your objective, another thing you should always be prepared for is the uncertainty of such investment, and risks associated.

Mutual funds are designed for investors who can ask questions to themselves and take risks keeping all the valid things in mind.

Sit back and think of all your household liabilities, which may or may not allow you to invest in such risky schemes. If you are prepared for the risk tolerance, then you can move further with the process.

Skip mutual funds with high turnover ratios:

While investing in mutual funds, it is essential that you focus on the turnover rate percentage of a mutual fund, which is bought and sold every year.

The main reason to avoid high turnover mutual funds is the tax as taxes can take a huge share of your profit, especially when you are lucky enough to occupy the position of the income ladder.

Make sure you are starting with a mutual fund that has a turnover percentage of less than 50.

Look for performance

Performance is a confusing word when we talk about investments. Many of the investors go with the past high performing funds, which does not necessarily result in profit always.

However, you can consider to research a little more, and make a list of 3 to 4 consistently performing options.

For instance, you can cut the names of poor performing and high turnover funds, or funds with excessive fluctuation in the graph. Once the options are narrowed, you can go with the option that at least has been performing around 20 to 60 per cent every year.

Read the documents carefully

Whether you have hired a professional to help you in the process, or if you are doing it on your own, never invest in any scheme without reading the offer and terms document properly.

This may seem shallow, but most of the people take it for granted and regret later.

All the information, details and statements provided by the offer document should be double checked with the AMFI (Association of Mutual Funds in India) website so that you avoid the risks of getting trapped into a financial blunder.

The AMFI provides information and sets standards to organise mutual funds and investments market in India.

If you do not fully understand the terms or conditions, consult more than one expert before you 

Select an apt scheme

Whether you have selected a regular plan or a complex one, choose the schemes option before anything.

People who want to get only capital enjoyment after a certain period of time should go for the growth opportunity, while those who want to get a bonus at certain intervals should opt for the distribution opportunity.

Liquidity norms

Maintain accurate liquidity norms to ensure that your mutual fund portfolio can be liquefied whenever you are thinking of making improvements.

Consider your age

Young people have more risk taking abilities as compared to senior and older investors.

When you invest, consider using your due diligence so that your stock funds let you enjoy profit for a longer period of time.

Once you have invested your capital in a scheme, review the scheme every 6 months or yearly as per the time range of your financial goals.

This is an essential method, which helps in maintaining your investment returns over that extended period.

If you have any difficulty or fail to receive any assistance from the AMC or any other body, you may immediately complain to SEBI.

Naval Goel is founder, CEO, PolicyX, an online insurance aggregator.

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