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How to invest in Mutual Funds

1. Introduction:

Ramesh had got a job six months ago. He was not happy with the interest received on his savings from his bank account as it didn't even match the inflation rate. Due to his profession and education from a non-finance background, he prefers to stay away from numbers and financial management. His colleague Suresh advised him to go for Mutual Funds. Let's understand why-

2. What is a Mutual Fund?

A small fish can never defeat a large fish on its own. When a large group of small fish band together and attack, a big fish can be scared away. Investing in mutual funds works similarly. While small investors with limited knowledge cannot consistently beat the market, it is easier for investors to make money by beating the market when they pool their money and invest in a mutual fund managed by a knowledgeable fund manager.

A mutual fund is a diversified portfolio of stocks and bonds managed by asset management professionals (AMCs). Mutual funds are a type of indirect investment in which your money is spread across various asset classes like bonds, stocks, money market instruments, gold, and other securities.

3. How does Mutual Funds work?

A mutual fund pools money from a large group of investors for a shared objective declared in advance. These mutual fund schemes are managed and operated by asset management companies (AMCs). Each scheme has a distinct investment objective that caters to specific investment requirements.

A mutual fund's basic principle is to pool money from a large number of investors. In the form of units, investors receive a proportionate share of the pool. A mutual fund manager manages the collected funds on behalf of the investors and decides what securities to buy or sell as per the strategy of the mutual fund scheme. As the corpus of the mutual fund scheme makes money, the profits are distributed to the scheme's investors in their invested proportions which reflects in the increase of NAV (Net Asset Value).

4. Types of Mutual Funds:

Mutual funds are divided into various categories. Each fund type has a specific goal in mind. Here are some of the most common types of mutual funds:

a. Equity Funds:

These funds are primarily invested in various companies' equity shares. You may choose to invest in these funds if you want to make long-term gains and are willing to take moderate to high market risks. These funds have a high rate of return.

b. Debt Funds:

Government securities, such as bonds, Treasury bills, and corporate deposits, are the direct investments of debt mutual funds. These funds are best suited for you if you don't want to take market risks and are content with moderate returns on a short-term investment horizon.

c. Hybrid Funds:

The investment of these funds is split between equity and debt securities. They combine the advantages of both asset classes while posing low to moderate risks. You can put your money into these funds to strike a balance between the risks and the returns.

Additional Read: ICICI Direct- 5 things about hybrid funds

5. How to start a mutual fund investment?

a. Recognize your risk tolerance and risk capacity. The term "risk profiling" refers to the process of determining how much risk you are willing to take.

b. The next step is to allocate assets. Once you've determined your risk tolerance, you should consider investing in a variety of asset classes. Your asset allocation should ideally include a mix of both equity and debt instruments to balance the risks.

c. Then you must determine which funds invest in each asset class. You can compare mutual funds based on their investment objectives and past performance.

d. Choose the mutual fund schemes you want to invest in and fill out an online or paper application.

e. It is critical to diversify your investments and follow up on them to ensure that you get the most out of your money.

6. Ways to invest in a mutual fund:

A. Offline Method:

You can invest in mutual fund schemes by going to the fund house's nearest branch office. Just make sure you have a copy of the following documents with you –

  • A copy of address proof
  • A copy of identity proof
  • A cancelled cheque
  • Passport-sized photographs

You will receive an application form from the fund house, which you must complete and submit along with the required documents.

B. Online method:

Investing in mutual funds via the internet is now available from most fund houses. All you have to do is follow the instructions on the fund house's official website, fill out the required information, submit KYC documents, and you are ready for investing after due verification. You may also opt for investing in mutual funds through an online mutual fund aggregator or your stockbroker. Then, you will have to complete the KYC process online (e-KYC), which requires you to enter your Aadhar number and PAN. The data will be verified in the backend, and once that is completed, you can begin investing.

According to a well-known financial proverb, to become wealthy, you must earn money even while sleeping. Investing in mutual funds can be a simple way to accomplish this. Your corpus grows when you invest in mutual funds monthly. It may start slowly, but over time, your investment may increase significantly. So, determine your objectives, choose appropriate funds, and begin investing.

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.

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