Nowadays, a lot of young people are becoming aware of different modes of investment which hold the potential to offer better returns. Mutual fund investments can be one of the modern investment tools which have a proven track record of providing better returns than traditional investment tools like bank fixed deposits or public provident fund. Mutual funds are gaining popularity among investors of almost all age group. They can be an ideal way to get exposure to stock market investment. Especially for those who may not have the surplus to purchase company stocks, mutual fund investments can be an ideal way to start.
Investors, irrespective of how much amount they plan to invest, are expected to identify their financial goal, and then work towards it. An investor’s investment goal must always align with his/her risk appetite and investment horizon. Having a clear financial goal and understanding your risk appetite should help investors successfully plan all their investments.
If you are someone who is particularly new to the mutual fund investment world, we have a few tips that might help you build a diversified mutual fund portfolio. But first, let us understand what mutual funds are and how they work.
What are mutual funds?
Fund houses and AMCs (Asset Management Companies) offering mutual funds generally collect money from investors who share a common investment objective and invest this pool of fund in equities, government bonds, debt securities, or other money market instruments. A mutual fund is this pool of money and is generally managed by a professional and experienced fund manager.
AMCs usually charge a small fee from investors for managing their money. Mutual funds may be one of the investment tools for investors who might be new to the world of investing and do not know much about the same. Investors may opt for a mutual fund scheme depending on their investment objective and commence investing with the hope of getting a step closer to their ultimate financial goal.
How do mutual funds work?
Once you open an investment account, you need to pick or choose a mutual fund that has the potential to help you get near to your investment objective. Once you decide on which fund to choose, the next step to either opt for lump sum payment or to invest in that fund through monthly SIP. Systematic Investment Plan or SIP allows investors to pay their monthly investment premium in a hassle-free way. All an investor has to do is instruct her/his bank, and a predetermined amount gets debited from their bank account on a fixed date every month and is transferred to their selected mutual fund.
Just like stock traders receive company shares, mutual fund investors receive units in the form of NAV. An investor may be allotted units depending on the fund current NAV in the market. The net asset value of a company may fluctuate depending on the vagaries and fluctuations in the equity market.
What are the requirements to become a mutual fund investor?
Well, by now, you know what mutual funds are and how they work, but you still do not know how to invest in them practically. This is how you go about it – first and foremost make sure that you have a bank account and secondly make sure that you get your KYC done (in case you haven’t ). Know Your Customer or KYC is a onetime prerequisite mandatory for all mutual fund investors, and one can even get their KYC done through the internet. If you do not want to complicate your life, you can simply fill a form manually and submit your KYC form with the required documents to your bank and get your KYC sorted. You might need to submit self-attested copies of your address proof, your PAN card and passport size photographs.
So basically, you need a PAN card, an AADHAR card, an address proof and few passport size photographs to support your KYC application.
Which mutual fund to invest in?
Once you become KYC compliant, then lies the biggest question, which mutual fund to invest in? Although we cannot tell you exactly which fund to invest in, we might help you in realizing which fund might be better for you. But before investing your hard earned money anywhere, it is necessary for investors to ask themselves the most important question – ‘What is my purpose of investment?’ Yes, having a defined financial goal might help investors in picking a mutual fund that may align with their goal. If you are someone who wants to invest for the long term, you may want to consider in equity mutual funds. On the other hand, short term investors with low risk appetite may opt for debt funds. But investors should bear in mind that these statements are purely subjective and might vary from time to time.
How much money to invest in mutual funds?
For investors to identify how much amount they need to invest in mutual funds, they again need to turn to their investment objective. Do you wish to save for the short term to buy a bike or a car? Or are you saving to build a retirement corpus or are you investing in building a corpus to buy a house? The amount you need to invest regularly will solely depend on what you wish to achieve ultimately.
Are mutual funds taxed?
This is probably the most important question as we near the end of this article. Gains on equity mutual funds held for more than one year are treated as long-term capital gains (LTCG) and taxed at 10 per cent. However, long-term capital gains are only applicable to gains exceeding Rs. 1 lakh per fiscal year. If you happen to sell your mutual fund investments within a year, the gains on selling these investments are treated as short-term capital gains (STCG) and taxed at 15 per cent.
We hope that the above knowledge about mutual funds helps new investors in making an informed decision. However, it is always recommended to take expert advice or consulting before investing in mutual funds.