How to invest in mutual funds?

Mutual funds have become the most popular investment option for retail investors in India. At the end of March 2022 (March 31, 2022), the total assets under management (AUM) of the mutual fund industry stood at around Rs. 38 lakh crore.* 54% of these assets are owned by retail and HNI investors (as on February 28, 2022). There are nearly 5.2 crore SIP accounts and according to AMFI the average monthly SIP flow is Rs. 11,000 crores (by February 2022). Due to increasing awareness among investors, the popularity of mutual funds is set to increase further but mutual funds still account for a low percentage of household savings. We will explain the benefits of mutual funds and how to invest in mutual funds.

How Mutual Funds Work?

Mutual funds work on the basis of pooling money from a large number of investors. A fund house collects money from investors and invests in various financial securities like stocks, bonds etc. The securities are selected according to the investment objective of the fund. For example, if the fund’s investment objective is capital appreciation, the fund will primarily invest in equities. However, if the objective is to generate income, the fund will invest in money markets or bonds. Mutual fund schemes are managed by professional fund managers whose aim is to ensure that investment objectives are met.

Why should you invest in mutual funds?

Before knowing how to invest  in mutual funds, one should know why to invest in mutual funds.

• Risk Diversification: Mutual funds offer risk diversification by investing in a portfolio of stocks or bonds across multiple sectors or issuers. A diversified portfolio reduces the risk associated with a single stock or bond.
• Professional Management: Mutual funds are managed by professional fund managers whose objective is to ensure that the scheme’s investment objectives are met. Fund managers are assisted by a research team that helps in selecting stocks and managing the scheme portfolio.

• Range of solutions: Mutual funds offer a wide range of solutions for different investment needs and risk appetite. Investing in equity funds can be for long-term goals like retirement, higher education of children, marriage, etc., while investing in debt funds can be if you want regular income or have low investment needs. Hybrid mutual funds combine both equity and debt for investors with different risk appetites
• Investment Modes: You can invest in lump sum or through Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs) depending on your specific financial situation and needs. In this article we will discuss how to invest in Lump Sum, SIP and STP
• tax benefits:Mutual funds are a tax efficient investment solution. In equity funds, short-term capital gains (held for less than 12 months) are taxed at 15% and long-term capital gains (held for more than 12 months) are tax exempt up to Rs 1 lakh in a financial year and are taxed at 10% thereafter (capital gains above Rs. 1 lakh). In non-equity funds, short-term capital gains (held for less than 36 months) are taxed at your income tax rate and long-term capital gains (held for more than 36 months) are taxed at 20% after allowing indexation benefits. Interest income from most traditional fixed income investments is taxed at the investor’s income tax rate. For investors in higher tax brackets, mutual funds offer significant tax benefits compared to traditional fixed income investments.

1. Tax Benefit: To avail Section 80C tax benefit, you can invest in ELSS mutual funds.
2. Liquidity: Open ended mutual funds are the most liquid investments after bank deposits and are much more liquid than investments like life insurance schemes, infrastructure bonds, post office schemes etc. Investors can redeem their units in open ended funds usually on T+3. (transaction + 3 days) basis. Liquid, overnight, short duration and ultra-short funds can generally be redeemed on T+1 day.

How to buy mutual funds?

Now let’s discuss how to start investing in mutual funds. There are various ways to invest in mutual funds as per your preference and convenience. Each has advantages and disadvantages. Before we discuss, the different methods of investing in mutual funds, there are certain requirements that must be met before starting to invest in mutual funds.

How to start investing in mutual funds?

Before you start investing in any financial product like mutual funds you need to be your client (KYC) compliant. To be KYC compliant you must have the following documents

• A recent passport size photograph
• Proof of Identity (eg Passport, PAN Card)
• Copy of your PAN card
• Address proof (eg Aadhaar card)
• KYC form duly filled. You can get the KYC form from the offices of Registrars and Transfer Agents (RTAs) or Asset Management Companies (AMCs). You can ask a mutual fund distributor or financial advisor to help you meet the KYC requirements.

You can submit these documents to AMC or RTA to process, verify and update your KYC status. One of the steps to verify your KYC is Personal Verification (IPV). Personal verification can be done by visiting the offices of KYC Registration Agencies (KRAs), AMCs or RTAs. You should know that RTAs are also KRAs. Your mutual fund distributor can also do the IPV for you. Investors should also know that many AMCs facilitate online KYC, whereby you upload KYC documents and do your IPV over a video call.

How to check your KYC status?

The KYC process usually takes a few days. You can check your KYC status online using your PAN by visiting Central Depository Service Limited website. Provide your PAN and check your KYC status. If your KYC is verified, the status will show “MF-Verified”; It means you are KYC compliant. If your KYC has not been verified, the status will show “pending”. If you are not able to check your KYC status online, you can contact mutual fund distributor or AMC/RTA. Once you are KYC compliant, you can start investing in mutual funds. Let’s discuss how to invest in mutual funds.

How to invest in mutual funds

1. How to invest in mutual funds through a mutual fund distributor?AMFI Registered Mutual Fund Distributors provide financial advice and assist investors in mutual fund transactions. A commission is paid to distributors by fund houses; Hence they do not charge any fees from the investors. Mutual fund units purchased from these distributors (regular schemes) cost more than units purchased directly from AMCs. For new investors, it would be wise to invest through a mutual fund distributor. You should know that mutual funds are subject to market risk. Different mutual fund products have different risk/return profiles. A mutual fund distributor or financial advisor can help you choose the right mutual fund product for your risk and investment needs. If you need help understanding your risk appetite,
2. How to invest in AMC directly in mutual fund? You can invest directly by visiting AMC offices or through their online portal. If you are a new investor then you need to submit your KYC documents at AMC office or online. You can buy direct plans, which cost less than regular plans from AMCs. If you are an experienced investor, understand your risk appetite and have knowledge of mutual fund products and financial markets, you can invest in direct schemes. The returns of direct plans are higher than the returns of regular plans.
3. How to invest in Mutual Funds through a Registered Investment Advisor (RIA)? You can invest through a SEBI Registered Investment Advisor (RIA). RIAs do not receive commissions from asset management firms. You may invest in plans directly through an RIA, and the RIA may charge you a fee for his or her services. One of the perceived advantages of investing through an RIA is that there is no conflict of interest, as the RIA does not receive a commission from the AMC. However, as codified in AMFI’s Code of Conduct for Mutual Fund Distributors, a mutual distributor is also expected to give you unbiased advice and put your interest above his/her own. You should do your own due diligence before deciding to invest through a mutual fund distributor or registered investment advisor.
4. How to invest in mutual funds through Registrar and Transfer Agent (RTA)? Registrars and transfer agents process mutual fund transactions on behalf of fund houses. If you are dealing through RTAs, you should know which RTA service the AMC is offering for the plan you want to buy. You can visit the RTA website or visit their offices to check which AMC services are offered by the respective RTA. You can invest in both direct and regular schemes through RTAs. The advantage of investing through RTAs is that you can transact (investment, redemption, switch etc.) of multiple mutual funds of different AMCs, provided the AMC’s issues are serviced by the same RTA.
5. How to invest in mutual funds online? Your KYC must be registered to invest through the online portal. Some portals help you register your KYC. Those considering how to invest in mutual funds online have  many options.
6. How to Invest Online in Mutual Funds through AMC Portal:
   All mutual fund houses also offer online investment option through online banking for payment (investment). While investing online you should carefully check whether you are investing in regular or direct schemes.
7. How to Invest Online in Mutual Funds through RTA Portal:
   All RTAs also provide online investment option through online banking for payment (investment). While you are investing online check whether you are investing in regular or direct schemes. One of the advantages of investing online through the RTA portal is that you can view your portfolio of mutual fund schemes of AMCs serviced by RTA at one place. You can also view your capital gains statement on the RTA portal.
8. How to invest in mutual funds online through mutual fund distributors’ websites:
   Many mutual fund distributors also provide online investment facilities through their own websites. One of the advantages of investing online through your distributor or financial advisor is that you can view your entire portfolio of mutual fund schemes at one place.
9. How to invest in mutual fund through stock broker? Stock brokers who provide online trading and demat services also offer online investment in mutual funds. Stock brokers, who offer these services are also AMFI registered MF distributors and therefore offer regular schemes.
10. How to invest in mutual funds through your bank? Most banks offer wealth management services through which you can invest in mutual funds. Since banks are also mutual fund distributors, you will invest in regular schemes. Some banks may offer mutual fund related services through wealth managers in bank branches or online mutual fund investment facilities.
11. How to invest in mutual funds through mobile apps? Many AMCs and all RTAs facilitate mutual fund transactions through their mobile apps. Through these mobile apps you can do all types of mutual fund transactions viz. One Time Investment, Additional Purchase, SIP, STP, SWPs, Switches, Redemption etc. These apps can be downloaded from Google Play Store for Android phones. Some mutual fund distributors also have mobile apps for mutual fund transactions.

How to invest in mutual funds from your bank account?

Investors should know that you can invest in mutual funds only through your own bank account through check or online banking. You can also invest in cash but up to a maximum of Rs 50,000 in a financial year. You should also know that third party transactions are not allowed in mutual funds. In other words, someone else cannot invest on your behalf. 

Your name should be printed on the page of the check or the account holder (first or joint) of the savings bank account if you are paying using online banking. Similarly, you cannot invest for anyone else eg. In the account of parents, siblings, relatives or any other person.

You can invest jointly with your spouse if you invest from a joint account where both you and your spouse are account holders. You can also invest on behalf of your minor child if your child is the sole account holder represented by the parent/guardian. Joint holding is not allowed in the mutual fund folio of a minor. 

You can invest for your minor from your bank account. Once the child turns 18 and becomes a major, the first thing you as a parent/guardian need to do is to change the sole account holder status from minor to major. Now as an adult, your child will be responsible for the tax consequences.

How to invest in mutual funds based on asset class?

Mutual funds can be classified into three broad categories viz. Equity, debt and hybrid based on various asset classes like equity, fixed income etc.

• Equity Mutual Fund: These mutual funds invest in equity and equity related securities. The main investment objective of these funds is capital appreciation. Equity mutual fund market can be further classified on the basis of capital segment viz. Large cap (top 100 stocks by market cap), midcap (101st to 250th stocks by market cap), small cap (251st and smaller stocks by market cap), large and midcap (top 250). Stocks by market cap, minimum 35% in large cap and 35% in midcap), multicap (25% each in large cap, midcap and small cap). There are different types of equity funds based on investment strategies viz. Focus, value, contra etc. There are also equity funds that invest in specific themes or sectors (eg healthcare, consumer, financial services, FMCG, infrastructure, IT etc.). Different equity funds have different risk return profiles.
• Debt Mutual Funds: These mutual funds invest in debt and money market instruments. The main investment objective of these funds is income. Debt Mutual Fund Maturity (when the instruments mature) or duration (interest rate sensitivity, also closely related to the maturity of the instruments) e.g. Overnight (instruments maturing overnight), liquid (instruments maturing in 91 days), ultra short duration (average duration 3 to 6 months), short (average duration 6 – 12 months), money market (instruments maturing within 1 year), Short duration (average duration 1 to 3 years), medium duration (average duration 3 to 4 years), medium to long duration (average duration 4 to 7 years), long duration (average duration more than 7 years). Corporate Bonds, Banking & PSUs, Gilts, e.g. Credit risk (low rated instruments etc.). Different debt funds have different risks (eg interest rate risk, credit risk etc.). ) and return profile. Consult your financial advisor to understand which debt funds may be suitable for your investment.
• Debt Mutual Funds: Hybrid funds are mutual fund schemes that invest in multiple asset classes e.g. Equity, fixed income, gold, real estate investment trusts etc. The investment objectives of these funds are capital appreciation and income. The main advantage of hybrid funds is asset allocation. Asset allocation diversifies investment risk by spreading investments across two or more asset classes. The risk profile of a hybrid fund depends on the asset allocation of the scheme. There are various types of hybrid funds with different asset allocation profiles viz. Aggressive Hybrid (65 – 80% in Equity, 20 – 35% in Fixed Income), Dynamic Asset Allocation or Balanced Leverage (which dynamically manages equity and fixed income asset allocation, no upper or lower limit, Equity Savings (at least 65% in Equity with hedging or arbitrage %, minimum 10% in fixed income), Multi asset allocation (minimum 10% each in at least 3 asset classes eg equity, fixed income, gold etc.), conservative hybrid (75 – 90% in fixed income, 10 – 25% in equity), arbitrage fund (minimum 65% in equity, (using arbitrage strategies) Different hybrid funds have different risk return profiles. Consult your financial advisor to understand which hybrid funds may be suitable for your investment.

How to invest in mutual funds for tax savings?

Investment in Mutual Fund Equity Linked Savings Scheme (ELSS) qualifies for deduction from your taxable income under Section 80C of the Income Tax Act. ELSS units are locked for 3 years from the date of investment; You cannot redeem your units during the lock-in period. There is no upper limit for investment in ELSS but you can claim deduction under section 80C up to a maximum limit of Rs 150,000.

How to invest in mutual fund in lump sum?

Lump sum investment, also known as one time investment, invests your entire amount at once. This is the simplest form of investment. For lump sum investment, you need to choose a mutual fund scheme that suits your financial objective and risk tolerance. You can invest in direct or regular plan as per your choice. You should consult your financial advisor if you need help in choosing a mutual fund scheme. You should also select a scheme option eg. Growth, Income Distribution and Capital Withdrawal (IDCW) etc.

In the growth option, the profit of the scheme will be reinvested in the scheme, while in the IDCW option, the profit of the scheme can be distributed to the investors as per discretion. of AMC. If your goal is capital appreciation or wealth creation, you should invest in growth options because you can benefit from the power of compounding. If you want cash flow from your investments on a regular basis then you can invest in IDCW option. You should note that IDCW payments or dividends will be taxable in your hands as per your income tax rate.

How to invest in Mutual Fund SIP?

A Systematic Investment Plan (SIP) is a mutual fund investment facility where you invest relatively small amounts at regular intervals. Through SIP investment you can invest a certain amount in any open ended mutual fund scheme of your choice. To invest through a SIP investment plan, you need to register for a Systematic Investment Plan by submitting a Bank Electronic Clearing Services (ECS) order where you have to specify the SIP amount, interval and SIP date. 

Through an ECS order, you instruct the bank to debit a specified amount and deposit it in the mutual fund on a specified date in a month. ECS order can be submitted to AMC or RTA through online or paper form. You must have sufficient balance in your savings bank account during the SIP days otherwise your SIP transactions will fail. SIP is an ideal investment for your long term financial goals.

Summary

Mutual funds offer investment solutions for various investment periods and objectives – short term, medium term and long term. Here, we have discussed not only how to start investing in mutual funds but also how to invest in mutual funds online. You should know the pros and cons of various mutual fund investment options to make an informed decision. Even if you have already invested in mutual funds through any of these options, you should make yourself aware of the many ways to invest in mutual funds to ensure that you are availing the best option as per your needs and convenience.