A Beginners Guide To Understanding Mutual Funds

We’ve all heard the advertisement calling customers to “read the offer document carefully” before investing in mutual funds. There’s no doubt that it’s gotten you to wonder if mutual funds really did pose a risk. The fact remains, no matter who you are or how much you earn, mutual funds are one of the most efficient ways to save, invest, and double your money. And while it can get confusing if you’re new to investing, here’s a lowdown of what you should know before signing on that dotted line.

What are mutual funds?

They are a collection of funds that are pooled together from investors to further acquire stocks, equities, and bonds. An objective is decided upon, post which the amount is collected and invested. Once there is an increase in the income, the final amount is divided amongst the shareholders.

Types of mutual funds

Overall, there are three different types of mutual funds:

1. Open-ended

Here, investors have the freedom to buy into or sell their stakes at any time. They don’t have to wait for a particular time for their investment to reach a peak. The various types of open-ended investments are:

(a) Debt/Income

The investments are made in fixed deposits, gold, debenture and bonds. You can put the amount that was invested in these as a part of your short term plans, monthly income plans, flexible maturity plans, etc. If you’re not clear about where to begin, investing here is low-risk and gets you low returns, but you’ll understand the basics on how your money is being used.

(b) Money Market/Liquid

These are mostly short-term deposits, and are made in fixed income, which is a set amount of money. The benefits that investors get out of this is that they get liquidity, which means they can get their returns within 90 days.

(c) Equity/Growth

The basic idea behind this type of investment is that you will be generating an income as an investor, or some gains in capital. Sometimes, you can get both income and gains, thus doubling your profits. For example, if you have invested INR 500, you will not only get some returns, but those will again be invested to get you more income.

(d) Balanced

This type of investment provides a balance between equity funds and fixed income. This way you as an investor will have the option to invest more, but also be cautious as to where your money is going.

2. Close-ended

Unlike open-ended funds, there is a fixed maturity period. You can only invest in the initial periods and cannot withdraw till the term is up. These are again divided into two more categories:

(a) Capital protection

Here you invest both in equity plans and fixed income securities. However, the investment in equity is less since the focus is on the income, while also getting higher returns.

(b) Fixed maturity plans

The return on investment (ROI) is low here, mostly because the investment is done in smaller shares. Since these mature after a fixed period of time, they are not actively managed, as compared to the rest of the funds.

3. Interval

This is a combination of open and close ended funds, and allows you to invest at certain periods, which can happen at a pre-decided time.

Benefits

• Your funds are handled by fund managers, hence you are not required to have an in-depth understanding of the stock market and how they work. Your fund manager takes care of all that.

• You can either invest a high amount, or start with as low as INR 500.

• Based on your objectives, you can decide between low, medium, and high risk levels for your returns.

• Some mutual funds allow you to withdraw at any given point of time.

• You could opt for Systematic Investment Plans (SIPs), where a specific amount of money is paid towards your mutual fund every month.

Disadvantages

Perhaps the biggest disadvantage is the risk factor that there is fluctuating returns on your investment, which in turn depends on the market performance. Another thing to note is that since you will be investing via fund managers, there will be additional costs involved beyond the investment money, such as their fee and commissions.

How To Invest

You can follow these simple steps to invest in a mutual fund:

Step 1: Register on a fund site

For first time investors, you can visit a fund site like cleartax.in and register yourself by filling in details such as name, date of birth, e-mail, mobile number, and PAN details. Do ensure that your Know Your Customer (KYC) is done beforehand, otherwise you can also get it done via the website. This is mandatory if you’re looking to invest.

Step 2: File personal details

Here you will have to share your personal details such as profession, income, nationality, and whether you’re a tax paying citizen in another country. Post this, there are some terms and conditions that you have to look at and agree to, in order to proceed to the next step. You also have the option to add an applicant here if you’re investing with a partner – either your spouse or business partner.

Step 3: Share nominee details

You put in your nominee’s details like their name, date of birth, and how much of the funds you want to allocate to them. In case of no nominees, you may skip this step.

Step 4: Bank details

Details of your bank account, such as the account number, IFSC code, and account type have to be filled in this step. A box will appear with a note confirming that investment and its redemption will be via the account. Check that and move on to the next step.

Step 5: Investment plan

You’ll have to select between the type of investment depending upon your objective; either a lump sum or via SIPs. At the next step, you have to select whether you’re investing directly or through an agent. Also, another thing to note here is that if you choose SIP then you’ll also have to fill in the details such as the frequency, and on which date the amount will be deducted from your account. The duration and number of instalments can be decided by you.

Step 6: Payment

You can choose to make the payment online or offline. If you’re opting for the online payment option, you can opt for auto-pay, which enables the amount to be deducted automatically from your account. You have to further register for the same via Netbanking, where a SIP Registration Reference Number will be provided to you to be shared with your bank.

Things to keep in mind

A couple of documents that need to keep handy during the registration process are:

• PAN card

• Identity proof, such as Aadhaar card/driving licence/voter ID/passport

• Ensure that your KYC is done, for which PAN card and Aadhaar card is necessary

• Latest passport-sized photograph

• Bank account number and type, IFSC code, E-mail ID and phone number