Investing your hard-earned money is as crucial as earning it. It offers a way to achieve different financial goals, generate passive income, and build a nest egg for a secure future. However, not everyone has the knowledge, time, and resources to invest in individual stocks, bonds, or other investments. Moreover, the market is unpredictable and it can be tough to keep up with market fluctuations and economic trends. That’s where mutual funds help.
Mutual funds offer an easy and accessible way to diversify your portfolio across different sectors and asset classes with professional management, low fees, and high liquidity. They now come with the SIP facility, which allows investors to buy mutual fund schemes periodically, bringing discipline through an automatic and regular investment strategy.
To help you invest wisely, here is a complete guide for investing in mutual funds.
- Understanding how mutual funds work
Mutual funds are investment schemes that collect money from many investors and invest the same in stocks, bonds, or other securities, distributing profits among them. There are different types of mutual funds based on asset class, sector, theme, structure, risk, and benefits. You must understand the type of mutual fund before investing in as it will determine the returns you get.
- Before investing, know your investment objectives
Identify your investment objectives. Do you want to invest for a short term or a long term goal? Are you looking for income or growth? Knowing your objectives will help you select the appropriate mutual funds. For instance, if your objective is long term growth, then a mutual fund with a high percentage of stocks can be suitable.
- Always go through mutual fund offer documents
Mutual fund offer documents provide valuable information about the scheme offered by an asset management company to the public. These include the scheme’s objective, minimum subscription amounts, cost structure (exit and entry loads), SIP details, fund manager’s profile and their experience, AMC details, etc.
By reviewing these details, you can better evaluate the risk return profile of a mutual fund investment plan.
- Importance of fund expenses
Mutual funds incur expenses, which are reflected in the total expense ratio (TER). It includes management fees, administrative costs, and other operating expenses.
As an investor, pay attention to the expense ratio as it significantly impacts your returns over the long term. For example, a lower TER means more money goes towards buying the actual assets in the fund instead of paying for its operational expenses. This helps you maximise both your returns and investment value.
- Ways to invest in mutual funds
You can invest in mutual fund schemes online through a bank’s or AMC’s website and investment apps. The online method allows you to easily buy and sell funds whenever you want. You can invest a lump sum or use a systematic investment plan (SIP) method, which staggers your investments in instalments to reduce risks.
To make things even easier, many fund houses and banks offer a lump sum and SIP calculator on their websites. These calculators help you estimate returns with three basic outputs- investment amount, tenure, and interest rate. Just click on calculate and get an insight into how much you will receive upon maturity. This means that you can create a plan, determine how much to invest, and set a timeframe to achieve your goals.
So, these are some pointers to help you get started with mutual funds and fulfil different goals and aspirations.