Mutual Funds for BEGINNERS

The biggest question today is, how can I trust anyone with my money. Every other person we meet claims to double the money in a year. The straight answer to them is closing the door on their faces.

If we want to get rich, we need to invest smartly. Only if we educate ourselves a little, we would be able to take much better financial decisions. I am sure at the end of this article, you will be 10 times smarter, financially. Today I will tell you:

  • What is Mutual Fund?
  • What are the different types of Mutual Fund?
  • How to pick the best Mutual Fund?

What is Mutual Fund?

In simple words, mutual funds collect money from people like us and create a money pool. A mutual fund manager then uses this pool to invest it in different stocks, assets, bonds, etc. We don’t have to worry about where our money is being invested because the fund manager takes care of it for a commission of 1% to 2%. If you want to invest long term then mutual funds are a great option because instead of sitting idle, your money will go and earn for you.

What are the different types of Mutual Fund?

There are 4 major types of mutual funds:

  • Equity Funds: They invest in shares, stocks of companies. They are considered high risk, but they also give high returns.
  • Debt Funds: They invest in debt instruments like debentures, government bonds. They are safe investments but their returns are also less.
  • Hybrid Funds: They invest in both equity and debt in some ratio. Their aim is to give you moderate returns at moderate risk.
  • ELSS Funds: These are tax saving funds that you can use to save income tax of up to Rs.1.5 lakhs under section 80C. These funds generally have a lock-in period of 3 years. Learn how.

Then there are Sector Funds, Gilt Funds, Tax Saving Funds which are pretty easy to understand, but for now, let us stick to the basics.

How to pick the best Mutual Fund?

If you want to invest short term, say 1 or 2 years, do not invest in equity funds. You should choose debt funds because they are a low risk than equity and give more return than a bank.

If you want to invest in the long term, there are 2 options:

  • Lump-Sum: It is when you invest a huge amount all at the same time.
  • SIP: It stands for Systematic Investment Plan. It is when you decide to invest a small amount (1000-2000) monthly. The amount will directly move from saving account to a mutual fund account. If you are new to Mutual Fund, then SIP is the best option.

If you plan to invest in the equity fund, there are different types of mutual fund to choose from based on risk and return:

  • Large-Cap: These schemes invest in big companies that are well established. The risk involved is very less.
  • Mid-Cap: These schemes come with moderate risk and moderate returns.
  • Small-Cap: These schemes invest in small companies. They come with high risk but returns will also be high.

If you are new to mutual funds, then I would suggest that you pick a fund that falls in the large-cap scheme. Before selecting a mutual fund to invest there are few things which you should certainly lookout in a fund.

  • Past performance and average yearly return on investment. You should at-least check 10 years of fund’s track record.
  • The risk profile of the funds so that we know that our investment would be low, medium or high risk.
  • The lock-in period if there is any.
  • The fund manager and his/her background.
  • Expense ratio: The amount that the fund manager will charge you to manage your account. It usually ranges between 1%-3%.

Once you are satisfied with your research online and you have picked your fund, you can go to the fund’s website. You’ll just have to enter your details, your SIP amount, the duration and your account will be set up!

The myth about Mutual Funds

There are some misconceptions that are needed to be cleared right away. There are 2 big misconceptions which most people have about mutual funds.

  • Most people think they need a DMAT account to start investing in mutual funds. This is absolutely not true. You just need a PAN card which is KYC compliant and that’s about it.
  • Mutual funds are going to make you rich overnight. Let me clear the air here. It’s not going to happen at all. You should always remember “Mutual funds are subject to market risk”, while they do offer a great rate of return.

So make sure that you do your own calculations, understand the risk profile, understand your risk appetite only then make your investment.

You can learn more about mutual funds here.

So with this I think, you have all the information you need to start investing in mutual funds, so what I expect you to do now is go back and start your investing process. In case you have still any query, you can comment below or mail me at lifeinhurry01@gmail.com.