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Chapter 3.4: Mutual Funds: How to Buy and Sell
Mutual funds have been around in India for nearly three decades now, but the number of people who actively buy and sell mutual funds in the country remains abysmally low as a percentage of the population.
The fundamental reason for poor participation in the mutual fund market is the lack of awareness; not just about the benefits of mutual funds, but also the knowledge of how to buy and sell them.
You have tackled the question of how mutual funds help you achieve your investment goals in earlier chapters. Now, let's go through the process of buying and selling mutual funds.
How to Buy Mutual Funds :
Mutual funds are versatile instruments that can be bought and sold in a variety of ways. Once you get all your paperwork in order, here are some of the various ways you can acquire mutual funds in India through Kotak Securities:
- Buying mutual funds through Kotak Securities is a great option for investors with limited knowledge about investing and even lesser time to do the paperwork by themselves.
- You can either trade mutual funds online through your trading account or call us and place an order.
- The brokerage house can also double up as a financial advisor, helping you out with options that you may not be aware of, offering tips and tricks to help you make the most of your investments.
- In addition to these, you can either buy directly from the asset management company or through a bank that sells mutual funds.
Once you have decided which way you want go and which mutual fund scheme(s) you want to invest in, you will have to place the order. Here’s the step-by-step procedure of buying a mutual fund:
- Get a demat account
- Go to the Mutual Funds section of Kotak Securities webpage. Login and then click on ‘Place order’. Or, you can call your broker.
- Select the name of the mutual fund or the AMC’s name that you wish to invest in.
- Then select the correct scheme as many fund houses offer multiple schemes.
- Specify the amount you wish to invest in the scheme.
- In case of a dividend scheme, select one of the two dividend options -- payout or reinvestment. If you select the payout option, the mutual fund’s dividends will be credited to your bank account. The reinvestment option allows the amount to be used to buy additional units of the scheme. You thus won’t get the dividends credited to your bank account. Select the former if you want a secondary source of income. The reinvestment option, however, helps you increase the size of your holdings and increase returns.
How to Sell Mutual Funds :
If you thought the amount of research done for buying a mutual fund was hard work, you’re about to repeat a lot of such work while selling your mutual funds. You need to do your homework and sell your mutual funds only if the timing is right to ensure that you always make a profit on your sale.
Some instances for when mutual funds ought to be redeemed:
- Most people sell their mutual funds to finance some immediate or upcoming financial requirement, like buying a house or car, paying for children’s education, a health crisis or even an upcoming foreign holiday.
- Another good time to sell off your mutual funds is when your investment requirements undergo a change – this could be due to inherent growth or changes in your existing portfolio or due to a life event that reorganizes your priorities.
- If the performance of a mutual fund dips consistently below expectations and other comparable funds for a sustained period of time. Here, ‘sustained’ refers to a time period of 1 to 5 years at least.
- Changes on the part of the mutual fund – a reset of its investment objectives or strategy, a rejig of its favored stock picks or sectors in which it invests or even the departure of a trusted fund manager often leads to the sale of such mutual funds by investors.
Do you see yourself in any of the scenarios? Then it’s probably a good idea to sell your funds and cut your losses early on.
There are two ways to sell your mutual funds – to another investor or back to the mutual fund. The latter is called redemption of mutual fund. Mutual funds are best redeemed the same route through which they are purchased. This means you could choose to redeem them online or offline, through an agent or broker or directly by yourself.
However, remember to check for any exit load or charges for sale of your MF units. This will be deducted from your total proceeds from the sale.
Common Mistakes to Avoid When Buying and Selling Mutual Funds
Mutual funds are managed portfolios of stocks, bonds and securities that offer investors the perks of participating in the stock market, but with a limited exposure to the risks involved.
Since this is the case, the need for 24 x 7 monitoring of your investments is probably unnecessary. However, this does not mean that you go into this process of investing in mutual funds completely blind and then live to regret your rash decisions.
Don't be in a hurry to sell off low performers
Some funds are slow starters that even out their losses given enough time and attention. Patience truly is a virtue when dealing with mutual funds. Exercise it and hold on to your low performers for at least a year before you decide to get rid of them.
A lot can change with the stock market or even your low performing fund in the span of a year. Experience shows that funds that are left to accumulate returns on for the longest periods of time are often the ones that offer the highest returns on investment for the investor.
In a downturn, don't sell everything off
Mutual funds, as mentioned earlier, are managed by professional stock market analysts and fund managers with years of experience in investing under their belts. In tough economic times, they take proactive measures to minimize the impact of the downturn on their portfolios, like switching sectors or specific stocks to minimize losses.
Don't use your 'gut feel' over the training of these professionals as a justification for selling off your funds as the economy starts cooling off.
Avoid putting your money into stock market bubbles
Every few years, we see at least one sector that shows extraordinary promise and has investors making a beeline for such stocks. This tendency to favor sectors that are the 'flavor of the season' spills over into mutual fund trading too.
Be very careful of such deep, sector-specific investments. They could well be the next dotcom bubble in the making. Check your call with a financial advisor, read up investing literature online or otherwise, speak to other experienced investors and then proceed with your sector specific picks
Don't pick funds based on their short term performance
Mutual funds must be evaluated based on not just their current returns but also on their long term – 1 to 5 year – returns. This is necessary to know if there has been a consistent pattern in the fund's performance over the years and also to ensure that short term market corrections don't negatively impact your choice of funds.
Don't go too narrow with your mutual fund choice
You may have done the most extensive research to arrive at the number one mutual fund option according to you. However, there are no guarantees in the world of stock and securities trading. There’s always a small risk of failure even with the best managed funds.
Don't put all your investments in one basket. Pick your top three or four choices and spread your risks among them. Make sure they are different types of mutual funds to actually benefit from this move.
Don't sell before your lock-in periods are over
Selling a fund before the lock-in period runs out is a wasted opportunity to make some returns on your investment. There are exit loads attached to such premature exits and they often nullify the profits that you might have made had you stuck till the end of the lock in period.
Another problem is short term capital gains tax that would become applicable on your investment, thus decreasing even further the ROI from the original investment.
While researching for mutual funds, you will come across multiple types of mutual fund schemes designed to suit every investor’s needs. These may sound confusing. In the next section, we will go through the multiple types of mutual funds in detail. We will also take you through the Systematic Investment Plan and Hedge Fund investing. To read these, Click here.
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