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Beginners guide on how to invest in mutual funds in India

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Mutual Fund Investment Guide for beginners

Mutual fund investment is a popular investment avenue among small investors. Mutual fund companies collect investors' money and invest it in various securities. Since each mutual fund is managed by professional experts or fund managers, investing in mutual funds is comparatively safer than investing directly in stocks. If you are a beginner or first-time investor, then mutual funds are undoubtedly the best alternative to start your journey in the stock market. Let us talk more about how mutual funds work, how much money you need to invest, why you should invest in mutual funds, and how you can invest in mutual funds in India.

How does mutual fund work?

A mutual fund is a type of investment that collects money from individual and institutional investors and invests it in various financial securities such as stocks, bonds, debt instruments, money market instruments, etc. In India, there are different types of mutual funds such as equity mutual funds, hybrid mutual funds, and debt-oriented mutual funds.

Each mutual fund is managed by a fund manager who strategically invests the money collected to achieve maximum returns. Fund managers are professional experts who have good market knowledge and manage the portfolio of mutual funds. Each mutual fund has an expense ratio, which is the fee charged to the fund manager and other operating costs for managing the fund's assets.

If you want to invest in mutual funds, you can either start a SIP with as little as Rs. 500 or you can also invest a lump sum amount at once. Small retail investors who do not have a large amount of money can even invest in mutual funds by using SIP. You have the option to start SIP monthly or quarterly.

Why should one invest in mutual fund?

There are plenty of reasons on why to choose mutual funds investment over other investment avenues;

  • Zero paperwork required as you can invest in any mutual fund scheme online
  • Low investment as SIP can be started with as low as Rs 500 per month
  • Invest in Equity Linked Saving Scheme (ELSS), tax-saving mutual funds under section 80C
  • Most suitable for retail investors to invest in mutual funds via SIP mode
  • Do not require market knowledge as it is managed by professionals
  • Plenty of mutual fund schemes provides a choice to investors to select the right scheme matching their risk profile
  • You can modify or cancel your SIP investment anytime at zero charges

How to invest in mutual funds?

Investments in mutual funds can be made either directly through the asset management company or through a stock broker that offers mutual fund products to its clients.

Start your paperless investment journey in mutual funds immediately without any hassles. Check out these simple steps to invest in mutual funds;

  1. Open a demat account with any broker by registering KYC digitally.
  2. Go to the mutual funds option.
  3. Select any scheme of your choice in sync with your risk appetite and investment goal.
  4. Choose the mode of investment between SIP and lumpsum.
  5. In case of SIP investment, select a SIP date for auto-debit.
  6. Recheck and confirm the order.
  7. You can register bank mandate with your broker so that the SIP amount on the due date gets auto-debited.

Mutual Funds; Direct Vs Regular Plans

Every mutual fund, whether equity, bond, or hybrid, has two plans - direct and regular. Direct plans can only be purchased through the fund company, as there is no intermediary for direct plans. In contrast, regular plans can be purchased through an intermediary such as a broker or distributor.

Today, some leading stockbrokers offer direct plans on their mutual fund platforms. Zerodha, Upstox, 5paisa, Groww, etc are some of the most popular names in this list. You can also switch from regular plans to direct plans.

  • Direct plans, as offered by AMCs, therefore have a low expense ratio and a higher NAV than regular plans. Investing in direct plans yields 1-1.5% more return in the long run.
  • If you are a do-it-yourself (DIY) kind of investor, you can invest in direct plans without seeking financial advice. However, if you are new to the world of mutual funds, it is better to invest in regular plans as you can get investment ideas or suggestions from your broker to help you choose the right plan for your investment.

Best Brokers for Mutual Fund Investment in India

As discussed above, opening a demat account is the first step of mutual fund investment with your broker. Hundreds of broker today accepts investment in mutual funds from clients but the question is which one is the best broker for investment?

As direct plans have less expense ratio, therefore, it is better to invest in direct schemes to get more returns. Open a mutual fund account with a top broker who offers direct plans and avail free mutual fund investment at zero subscription fee or brokerage charges.

Top 10 best brokers for mutual fund investment

How to select the best mutual fund scheme for investment?

Among thousands of mutual fund schemes available, which one to select for investment is a big question? Top performing MF is not the best for every kind of investors as investment in mutual funds is not risk-free and one needs to take extra care while selecting the right fund.

Here are the simple steps one should follow to select the right mutual fund plan;

  • Decide the goal of investment; The first step is you have to decide what your investment goal is like retirement fund, buying a dream home, children education, or just to get a bit extra return over saving deposits, etc.
  • Check your risk profile: Are you a risk-savvy or risk taker is an important thing to be clear in advance. As there are multiple categories of schemes available in the Indian mutual fund industry and one may not be suitable for every investor. Like, equity oriented schemes especially mid cap funds, small cap funds, or sectoral mutual funds are recommended to investors with high risk profile while debt and hybrid funds are suitable for low risk takers.
  • Shortlist the categories: Based on your goal, horizon, and risk appetite, you can select categories. Investors with high risk appetite and long-term horizon can go with equity funds while investors with low risk appetite and short-term investment can go with debt or hybrid schemes.
  • Select the right fund: Once you selected the category, choose the right mutual fund scheme after checking its AUM, fund management approach, and also check that how well the fund has been able to manage the downside during the market fall. To avoid risk of market timing, it is always better to invest via SIP route rather than investing lumpsum money.

Taxation on Mutual Fund Investment

Now you may have a question: are mutual funds taxable or not? If so, what is the tax rate levied on income from investments in mutual funds?

With the exception of tax-advantaged ELSS funds, all other investment funds are taxable, and the returns earned are taxed by investors according to the applicable tax rate.

Different tax rates are applied depending on the type of mutual fund you have invested in. Find out how mutual funds are taxed;

There are also dividend mutual funds where investors receive regular dividend income. The dividend amount is tax-free for the investor, as the distributing company has to pay dividend distribution tax (DDT) at 10%.

Mutual fund Type Short-term capital gain tax Long-term capital gain tax
Equity Mutual Funds If you have sold your investment within 1 year, then you have to pay 15% short-term capital gain tax. If you sell equity mutual funds after a year and receive gain of upto Rs 1 lakh then the entire long-term capital gain upto Rs 1 lakh will be tax-free. However, profit above the threshold limit of Rs 1 lakh will be taxed at 10%.
Debt Mutual Funds If you sold debt mutual fund units before 3 years, the returns will be taxed as per the applicable tax slab of investors' income. Profits on sell of debt mutual fund units after 3 years are called long-term capital gain. The returns derived will be taxed at 20% with indexation

Benefits of Investing in Mutual Funds

Check out the golden benefits of mutual funds investment, described below;

  • The mutual fund industry is regulated by the SEBI Regulations 1966 to ensure transparency and protect the interests of investors.
  • It is extremely easy to invest in a mutual fund of your choice through various channels like brokers, AMC, and banks.
  • Flexibility and convenience because if you are a salaried employee, you can invest a fixed amount on a regular basis by opting for a systematic investment plan (SIP). Mutual funds are thus an investment product that allows you to invest according to your budget requirements.
  • Investments in mutual funds can be made in very small amounts.
    Unlike FDs where your investment is locked in, mutual funds have no lock-in period, meaning you can withdraw your investment whenever you need it. The exit load will be applicable on withdrawal or redemption within a fixed time limit.
  • Only ELSS funds are locked in for 3 years, which is still less than other tax-saving investment alternatives such as FDs, Public Provident Funds (PPF), and Unit-Linked Investment Plan (ULIP).
  • As industry experts, we manage your investments to optimize the risk-return ratio.

Disadvantages of investing in mutual funds

  • Since equity funds invest mainly in stocks, it is a risky instrument that does not provide you with guaranteed returns.
  • Except for tax-saving ELSS schemes, other mutual funds are not tax-exempt and you must pay capital gains tax on the income.
  • If you have a low-risk tolerance but have invested in an equity mutual fund, you may be concerned about the fluctuating returns and may even book losses.

Final thoughts on mutual fund investment for beginners

If you are a beginner or first-time investor looking to start your journey in the stock market, you can take a step forward by starting a SIP in mutual funds. Not only is it a convenient way to invest in mutual funds, but it is also less risky as each mutual fund invests in multiple stocks and is managed by experts, which helps in good risk management.

Before investing in a fund, you must first decide what your investment objective is and review your risk profile to choose the right fund for your investment. Do not be disappointed by short-term losses and stay invested for the long term to get good returns.

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Last updated on 21st Jul 2023

User Reviews

2. Rajesh Jain Sep 08 2017 10:15:02 AM Reply
Nice and clear Article. Could you please guide me how can i start SIP in mutual funds.
2.1. Sanjeev Reddy Oct 27 2017 06:37:38 PM
Great Article, How can I open account with Zerodha. I like concept of Direct Plan investment.