• Invest
    Investment Suite
    Stocks
    Mutual Funds
    Future and Options
    IPO
    Exchange Traded Funds
    Commodity
    Stockcase (Stock Baskets)
    Currency
    Non Convertible Debentures
    Sovereign Gold Bond
    Exclusive
    NRI Account
    Private Client Group
    Features
    SipIt
    MTF
    Investment Suite
    Exclusive
    Features
  • Platform
    Product Suite
    Kotak Neo App & Web
    Nest Trading Terminal
    NEO Trade APIs
    Features and Tools
    MTF
    Securities Accepted as Collateral
    Margin Requirements
    Payoff Analyzer
    Calculators
    SIP Calculator
    Lumpsum Calculator
    Brokerage Calculator
    Margin Calculator
    MTF Calculator
    All Calculators
    Product Suite
    Features and Tools
    Calculators
  • Pricing
  • Research
    Research Calls
    Long Term calls
    Short Term calls
    Intraday calls
    Derivatives calls
    Pick of the week
    Top Monthly Picks
    Research Reports
    Fundamental Research Report
    Technical Research Report
    Derivative Research Report
    Research Calls
    Research Reports
  • Market
    Stocks
    Market Movers
    Large Cap
    Mid Cap
    Small Cap
    Indices
    Nifty 50
    Bank Nifty
    FinNifty
    Nifty Midcap India
    VIX
    All Indian Indices
    Mutual Funds
    SBI Mutual Funds
    HDFC Mutual Funds
    Axis Mutual Funds
    ICICI Prudential Mutual Funds
    Nippon India Mutual Funds
    All AMC's
    IPO
    Upcoming IPO
    Current IPO
    Closed IPO
    Recently Listed IPO
    Stocks
    Indices
    Mutual Funds
    IPO
  • Learn
    Resource
    Market Ready
    Kotak Insights
    Infographic
    Podcast
    Webinars
    Youtube Channel
    Quarterly Results
    Investing Guide
    Demat Account
    Trading Account
    Share Market
    Intraday Trading
    IPO
    Mutual Funds
    Commodities
    Currency
    Futures & Options
    Derivatives
    Margin Trading
    Events
    Budget 2024
    Muhurat Trading
    Share Market Holiday
    Market Outlook 2024
    Resource
    Investing Guide
    Events
  • Partner
    Business Associates
    Fund Expert
    Kotak Connect Plus
    Startup connect
  • Support
    FAQs
    Circulars
    Bulletins
    Contact Us
    Forms Download
    Get your Statement
​

How to Invest in Mutual Funds for Beginners?

  •  6 min read
  • 0•
  • 03 Sep 2024
How to invest in mutual funds for beginners?

Mutual funds have evolved as a popular investment option for many investors. Thanks to their professional management, diversification benefits, and the ability to provide capital appreciation coupled with initiatives undertaken by the regulatory bodies, mutual funds have become a viable financial option for addressing short- and long-term goals. If you are a beginner looking to invest in mutual funds, there are certain things you must know to get started. What are these? Let’s find out.

  • Complete KYC

When investing in mutual funds for the first time, you must complete KYC formalities. KYC, or Know Your Customer, is an identification process for first-time investors. You need to abide by KYC norms as per the Prevention of Money Laundering Act, 2002. You need to produce your primary identity and address documents for KYC, such as Aadhaar Card, PAN card, voter’s identity document, driver's license, passport, etc.

You can complete the KYC process online or offline. To complete the process online, fill out the online KYC form. You can download it from the website of the fund houses, Association of Mutual Funds in India (AMFI) or Registrar and Transfer agents (RTA). Provide your registered mobile number, Aadhaar number, and PAN card for verification via OTP. Once OTP verification is done, you need to undergo verification via video call, where you require showing your original address and identity documents.

To complete the process offline, download the KYC form and submit it with photocopies of your address and identity proof along with your PAN card to the nearest office of the fund house or RTA. Completion of the offline KYC process may take three to four working days.

Once done, you can invest in any number of mutual funds. You can invest directly through the AMC’s app/website, an intermediary like a bank, a mutual fund distributor (MFD), or any third-party fintech website.

  • Choose between direct and regular funds

Once your KYC is complete, you must choose between direct and regular plans. If you are confident investing independently, you can opt for direct plans. If not, opting for regular plans through an MFD is better. While the underlying portfolio of regular and direct plans remains the same, they differ in expense ratios - the fee you pay to the fund house for managing your investment.

Expense ratios for direct plans are lower than regular funds as fund houses don't need to pay any commission to the intermediary.

  • Choose between Growth and IDCW Options

This is a crucial choice to make. If you want to reinvest the profits generated from your mutual funds without withdrawing them, go for the growth option. On the other hand, if you want to get some portion of the profit (dividends) at regular intervals, the income distribution cum withdrawal option (IDCW) is a better option. With the growth option, you can benefit from the power of compounding in the long run.

Investing in mutual funds can be done through several methods, including lump sum investments and Systematic Investment Plans (SIPs). While lump sum investments involve investing a significant amount at once, SIPs allow you to invest small, regular amounts. SIPs are particularly beneficial for beginners as they average out the cost of purchasing mutual fund units and reduce the impact of market volatility. Choosing between these options depends on your financial situation, goals, and risk tolerance. Additionally, SIPs offer the advantage of disciplined investing, fostering a habit of regular savings. Both methods can be combined for a balanced approach.

Opening a mutual funds account involves choosing an AMC or an intermediary, completing KYC, and selecting the funds you wish to invest in. You can open an account online or offline through fund houses, banks, or third-party platforms. Ensure to compare different AMCs and their offerings before opening an account to find the best mutual funds to invest in. Additionally, review fees and past performance.

Buying mutual funds is a straightforward process once your account is set up. You can purchase funds through an AMC’s website, bank, MFD, or a third-party platform. Select the mutual fund based on your financial goals, risk tolerance, and fund performance. You can choose to invest via SIP or lump sum. Before investing, calculate mutual funds' potential returns using online calculators provided by AMCs or other financial websites to make informed decisions. Always review the fund's past performance and read the scheme-related documents carefully.

Investing in mutual funds offers several benefits, such as professional management, diversification, and liquidity. Mutual funds are managed by expert fund managers who make investment decisions based on extensive research. Diversification across various asset classes reduces the risk associated with individual investments. Additionally, mutual funds offer high liquidity, allowing you to redeem your investments as per your needs. They also provide a wide range of options to cater to different financial goals and risk profiles, making them a versatile investment vehicle for both beginners and seasoned investors. Furthermore, mutual funds offer systematic investment plans (SIPs) for disciplined, regular investing, and tax-saving options.

Easy. Convenient. Budget friendly.

An SIP is simple yet impactful. Designed for beginner investors.

Start an SIP with just Rs. 100

Invest in mutual fund

As a beginner looking for mutual fund investment, you need to have an understanding of the below-mentioned aspects:

  • Financial Goal

Know the goal you want to achieve through mutual fund investing. Do you want to save taxes, build an emergency corpus, accumulate funds for higher education, or save for retirement? Each goal is unique and warrants a different approach to investing and choice of funds.

For instance, if you aim to reduce your income tax burden, you can opt for an equity-linked savings scheme (ELSS). For accumulating funds for higher education and retirement, investing in an equity fund can offer inflation-beating returns. Similarly, to build an emergency corpus, you can opt for liquid funds, overnight funds, or short-term debt funds. A holistic view of your investment goal will help you zero in on the correct fund.

  • Risk Tolerance

Next, you need to have an accurate estimate of your risk tolerance. Mutual funds are market-linked products, and a certain element of risk is involved while investing in them. If you have a high-risk tolerance, you can opt for equity funds. On the other hand, if market volatility makes you jittery, you can opt for debt funds, which are relatively less risky.

While it can be a bit tricky for you as a beginner to have an exact estimate of your risk tolerance, it is better to start with hybrid funds. These funds invest in both equities and debt. While the equity component assists in capital appreciation, the debt portion protects gains from taking a hit during a market downturn.

  • Understand Common Mutual Fund Terminologies

Before making mutual fund investments, it’s important to familiarise yourself with the various mutual funds - equity, debt, hybrid - and their common terminologies. This will help you better understand a fund and its characteristics. Some of the standard terms you should know as a beginner are as follows:

  • Asset Management Company (AMC): It is the name of the fund house that manages your investments. AMC is the financial institution that oversees all operations related to mutual fund investments, including investment philosophy, operations, compliance, administration, and customer service.
  • Asset Under Management (AUM): AUM refers to the total market value of assets that a mutual fund manages. It is an indicator of the size and success of a fund. Higher AUM often reflects investor confidence and the fund’s performance history.
  • Net Asset Value (NAV): NAV refers to the cost per unit of a mutual fund. When you invest in mutual funds, you are allocated units as per the fund’s NAV at the end of the day. NAV isn’t constant and keeps on fluctuating.
  • Expense Ratio: It covers operational, managerial and promotional costs the AMC incurs to manage your investments. It is expressed as a percentage. Different funds have different expense ratios, as per the limit set by the Securities and Exchange Board of India (SEBI). A high expense ratio can reduce your profits from the fund.
  • Exit Load: If you exit mutual fund investments before completing a specified period of investment (usually one year), you need to pay a certain penalty in the form of exit load. The exit load differs across funds. Certain funds may not have any exit load, e.g. overnight funds.
  • Systematic Investment Plan (SIP): An SIP allows you to invest a fixed amount in a mutual fund scheme at regular intervals, typically monthly. It helps in averaging the cost of purchase over time, reducing the impact of market volatility.

Summing It Up

Mutual fund investing as a first-time investor warrants completion of KYC, choosing between regular and direct plans, and opting between growth and IDCW options, among other consideration. Due diligence and a holistic understanding of your financial goals, risk appetite, and clarity on various fund categories and the associated terminologies are equally essential. It is a good idea to seek professional help to get started in case of any doubt.

FAQs

There is no fixed amount as such. As a beginner, you can start with as little as ₹500 and invest via SIP.

It depends on your risk profile. If you have an aggressive outlook, you can invest in equity funds. On the other hand, if you have a conservative approach, you can invest in debt funds. However, beginners may start investing in hybrid funds - a mix of equity and debt.

Did you enjoy this article?

0 people liked this article.

What could we have done to make this article better?

Enjoy Free Demat Account Opening
+91 -

personImage
Enjoy Free Demat Account Opening
+91 -