How to start investing in mutual funds

Everyone seems to be earning through the stock market. Why should you be left behind in the wave? Here is a beginner-friendly roadmap to get you started with mutual funds.

Earlier, people had no option, but to seek help from intermediaries like banks and stockbrokers. Needless to say, a good amount went away as the brokerage fee. Besides, the sheer amount of time that you had to put in, just added to the burden. Living in the advanced period, you should utilize online applications like Groww and IndMoney. They deliver an astounding stage to put resources into shared assets with their simple to-utilize interface and, additional features like the ability to track your investments and performance graphs of funds. And guess what, they charge zero commission for their services.

How to start investing in mutual funds

You can always choose the intermediary route. However, online applications are better as you get dual benefits of time and cost-effectiveness.

You just need to spend a few minutes signing up.

Fill in personal details like your name, parent’s name, and date of birth. They would require your identity credentials issued by the government like PAN Card and Aadhar Card. Bank account details like account number, and IFSC code is to be provided. Also, you need to provide a digital signature as a specimen. The applications generally ask for a KYC to be done for security and identification purpose.

After you have created your account, you need to verify your bank account number with them. With that being done, you are ready to sail through your investment journey.

Search for the mutual fund of your choice, deposit the amount required and just as easily, the units of mutual funds will be transferred to your Demat account. You can track them anytime and the transaction is entirely paperless.

But do you know how to choose the right mutual fund for yourself?

Mutual funds can, in a way, be broadly classified into 2 types

Active funds

These funds have fund managers who use their intellect and expertise in building the most profitable portfolio. They charge a higher commission. There is no guarantee that these funds will give the most profitable returns given, humans can make errors, and markets can turn volatile at any time. Here, you bet on the skill and expertise of the fund manager.

Passive funds/Index Funds

These are Nifty funds i.e.,50 top-performing companies. Investing in Index Funds means that your investment will always be allocated to the top 50 companies. The name of the company becomes irrelevant. E.g., X Ltd. was in the 50th position and your money was invested in it. Now, if X Ltd. falls by two ranks and supposes YG Ltd. rises to the 50th rank, your money will be taken out from X Ltd and will be invested into YG Ltd. In this manner, you will always be in a higher return portfolio. Passive funds have a much lower commission compared to active funds.

Some important checklists to select a good mutual fund if you want to be an active fund investor.

Fund history

Check how the fund has done for the past 5-7 years. This is because the recent years may have been a lucky season for the fund, you never know. Therefore, it is essential to look at the long-term performance of funds. 

Fund Manager

A brief check on your fund manager is required to get an understanding of his caliber – how has he performed over the years. Has he been able to generate handsome returns? How many funds does he manage? and so on.

Expense Ratio

Supposedly, you have invested $1000 and the expense ratio is 0.1%. This means that 0.1% of $1000 i.e., $10 will be charged for managing the portfolio. Varies from the range of (0.1-2.5) %. Lower the expense ratio, the better.

Exit load

The percentage of your investment that you have to give up to the fund manager if you exit a scheme before maturity is termed exit load. It varies from company to company and is usually seen at 1% in the first year and becomes 0% in subsequent years. Lower exit load is the route to go for.

Happy Investing!

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