How to Start Investing in Mutual Funds
Starting your investment journey with mutual funds is easier than it seems. Mutual funds are a simple and effective way to grow your money. They are very helpful whether you’re saving for dreams, emergencies, or your retirement. Here’s how you can confidently begin investing in mutual funds and take a step toward building your financial future.
Table of Contents
Know Your Goals
Start by understanding why you want to invest. Your goals will determine the type of mutual funds you choose. What are you investing for? A dream home? Retirement? Kids’ education? Clear goals help you choose the right funds. For short-term goals, like buying a car or building an emergency fund, opt for safer funds like debt funds. For long-term goals, like retirement or buying a house, equity or hybrid funds may be better. Write down your financial milestones and how much money you’ll need for each. Clear goals keep you on track and inspired to stay the course.
Know Your Risk Appetite
Are you comfortable with market ups and downs? Every mutual fund comes with some level of risk. Equity funds, for example, can give high returns but fluctuate with market conditions. Debt funds provide stability but come with comparatively lower returns. Hybrid funds give a balance between both. Ask yourself: Can you handle short-term losses to earn long-term gains? If not, stick with lower-risk options. Knowing your comfort with risk helps you avoid unnecessary stress and choose wisely.
How to Choose a Mutual Fund
Research funds that match your goals. Look at past performance of 3-5 years, fund ratings, its risk level, and expense ratios. Start with a trusted and diversified fund if you’re unsure.
Selecting a mutual fund
While choosing a Mutual Fund to invest in, we can consider basic features of a scheme like the core themes of the scheme (large/mid/small cap), Regular/Direct investment, expense ratio, past 5 to 10 years returns, size of the fund and experience of the fund manager etc.
Balance Between Returns and Expense Ratio
Initially new investors may get invested in funds with high expense ratio (ER) as they are only focused on their return history. Some of these funds may not generate the expected level of return in future. So, it’s better to prefer the funds with decent returns and lower ER than peers. Objective is not to sacrifice high return for low expense ratio but to try to lower the expense ratio of the overall portfolio as much as possible.
Should you invest through SIP or Lumpsum?
If you want to start small, SIP (Systematic Investment Plan) lets you invest as little as ₹500 a month. It’s a great option for beginners. It helps you develop a consistent investing habit. You will not have to worry about market ups and downs if you invest through SIP. SIP is a hands off approach to investing with least effort required. It keeps you disciplined and free from emotional biases that may affect your investment decisions. Beginner investors and investors with regular 9-5 jobs and little time to devote to researching should invest through SIP. More experienced investors can invest through lump sum if they have the time and effort to make it work.
Complete KYC
You’ll need to complete the Know Your Customer (KYC) process. It’s a one-time step where you provide ID proof, address proof, PAN number and bank account details. KYC can be done through any third party investing apps or website. These apps/websites offer you all the mutual funds of different companies in the same place. You don’t need to visit different websites. Most of these platforms now offer online KYC, which is quick and hassle-free. Once you are invested in one mutual fund your KYC is accessible to all other mutual fund companies. This means you don’t have to complete KYC every time you invest in a new mutual fund.
Start Investing in Mutual Funds
Search for the mutual fund you want to invest in the app/website you have registered in. Always invest through the direct plan with the growth option of the mutual fund scheme of your choice. Learning the basics of mutual funds will help you decide which mutual fund to invest in.
For new mutual fund investors picking appropriate funds can be challenging. Their investment journey will be easier, if they start with the simple index fund or exchange credit fund (ETF) that is based on Nifty 50 or Sensex. The investors should continue their investment in this fund for at least 1 or 2 years until they become accustomed to market volatility.
Automate Your Investing Process
Systematic Investment Plan (SIP) is a popular method that allows you to invest a fixed amount in a chosen mutual fund at regular intervals (weekly, monthly, quarterly etc). SIP automates disciplined investing and benefits from cost averaging. You purchase units at different price points, potentially reducing the average cost per unit over time.
Diversified Portfolio of Mutual Funds
In the long term try to create a well diversified MF Portfolio. Diversified portfolios mainly consist of large cap midcap and small cap funds. To build a diversified portfolio with a single fund Flexicap or Multicap fund may be used.
Although midcap and small cap funds provide higher return than large cap funds, large cap funds play the crucial role of reducing volatility in the investment portfolio. Large cap funds act like an anchor of your portfolio ship amid the turbulent sea of market volatility.
Reviewing Your MF investment
There is no need to check your mutual fund portfolio every day as there is a fund manager to do that. Your job is to see how the fund manager is doing. Once in a year review for rebalance requirements is a good start. At least 2-3 years performance should be compared before replacing a fund in our investment portfolio. You can maintain a spreadsheet to track my mutual fund investments. Once in a year, preferably at the end of the financial year, you can note down the CAGR returns generated by each fund. If you find that any mutual fund is underperforming compared to its peers during the last three years, you may replace it with a better performing one in the same category.
Stay Consistent
Investing is not a one-time event. It’s a habit. Stay disciplined and avoid withdrawing your money too early. The longer you stay invested, the more your money grows due to compounding. Stay focused on your long-term goals and don’t let short-term market ups and downs distract you.
Consistency is the key to building wealth. Start small, increase your investments over time, and trust the process. Every step you take today will be a gift to your future self.
Choosing the Right Mutual Fund
The best way to invest in mutual funds depends on your investment goals, comfort level, and access to investment platforms. Direct plans might be suitable for cost-conscious investors, while regular plans can offer guidance for beginners. Finally, SIPs can automate your investing and withdrawal strategy.
