How to Invest in Mutual Funds: A Beginner’s Complete Guide

Mutual fund investments surged in India reflecting increasing investor interest and the potential for promising long-term returns. If you are planning to grow your wealth, here is how to invest in mutual funds to get competitive returns for wealth accumulation. 

Key Highlights

• SIP enables monthly or quarterly investments with auto-debit, whereas lump sum allows a one-time amount. 
• Completing KYC with PAN, Aadhaar or address proof is mandatory before investing.
• NRIs can invest via NRE/NRO accounts; FATCA declaration may be needed for USA/Canada residents.

How to Invest in Mutual Funds?

One of the ways to invest in mutual fund regular plans is through the Association of Mutual Funds in India (AMFI)-registered distributors. The other ways are as follows:

• You can invest in mutual fund direct plans with Registered Investment Advisors (RIA) registered under SEBI. Notably, RIAs might charge additional fees for mutual fund investments.
• Registrar and Transfer Agents (RTAs) or fund houses allow you to invest in both mutual fund regular and direct plans.
• You can invest in mutual funds online by visiting AMC portals, RTA portals and distributor websites.
• As banks are distributors of mutual funds, you can invest in regular plans through banks.
• You can invest in mutual funds using dedicated mobile apps by Asset Management Companies (AMCs) or RTAs.

How to Invest in Mutual Funds Based on Asset Class?

You can invest in mutual funds across different asset classes, including equity, debt and hybrid funds, depending on your financial goals and risk appetite. Here are the ways to get started:

• Equity mutual funds primarily invest in stocks and are known for higher risk with the potential for higher returns. They are commonly categorised into large-cap, mid-cap, small-cap, and thematic or sectoral funds.
• Debt mutual funds invest in debt instruments with categories like ultra short-term fund, overnight fund, short-term funds and others. Usually, the debt component makes it suitable for generating income with relatively lower risk compared to equity mutual funds.
• Hybrid funds diversify your portfolio by investing across equity, debt, gold and real estate. Popular types include Balanced Advantage, Dynamic Asset Allocation, Aggressive Hybrid and Multi Asset Allocation funds.

How to Invest in Mutual Funds for Tax-Saving Purposes?

You can invest in ELSS funds if your objective is to gain tax benefits while investing in mutual funds. These funds allow you to claim tax deductions of up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961.

You may choose to invest either through a lump sum or via a Systematic Investment Plan. ELSS investments come with a mandatory lock-in period of 3 years, and in the case of SIPs, each instalment is locked in individually for 3 years from its respective investment date.

How to Start Investing in Mutual Funds Through SIP?

Investing in SIP facilitates regular investment for long-term wealth accumulation. Here is how to invest in SIP:

Step 1: Select the mutual fund and SIP option.

Step 2: Set the amount you want to invest at regular intervals, such as monthly or quarterly.

Step 3: Enable auto-debit from your bank account for debit on the specific date at regular intervals.

How to Invest in Mutual Funds in a Lump Sum?

A lump sum investment involves investing a single, one-time amount in a mutual fund. Here’s a simple step-by-step overview of how to invest in mutual funds through a lump sum:

Step 1: Open an account with a mutual fund investment platform.

Step 2: Choose a mutual fund that aligns with your financial goals and risk appetite.

Step 3: Ensure you check the historic performance, fund allocation and portfolio composition of your chosen fund.

Step 4: Deposit the lump sum amount in your mutual fund account through the chosen platform.

Step 5: Monitor your portfolio performance periodically to ensure profitability.

Before investing in a mutual fund, completing the Know Your Customer (KYC) process is mandatory. You need to submit identity and address proofs, like your PAN card or Aadhaar card. This step ensures compliance with the Prevention of Money Laundering Act, 2002. 

Once KYC is done, you can use a mutual fund calculator to check estimated returns for your desired investment horizon.

How Can NRIs Invest in Mutual Funds?

Non-resident Indians (NRIs) can invest in Indian mutual funds by opening either a Non-resident Ordinary (NRO) or Non-resident External (NRE) account. Choosing the right account is crucial. 

Funds in an NRO account are non-repatriable and harder to convert to foreign currency, whereas funds in an NRE account are fully repatriable and easily convertible.

Here are the steps to invest in mutual funds if you are an NRI:

Step 1: Choose the investment method between direct investment and Power of Attorney (PoA). If you choose the direct method, you can manage your investments yourself as an NRI. In case you choose a PoA, a person on your behalf can manage your investments. 

Step 2: Complete the KYC process for yourself and also for the Power of Attorney (PoA) if one has been appointed.

Step 3: If you are from the USA or Canada, you might have to submit a FATCA declaration for tax regulations.

Notably, you will receive your investment returns in your linked NRO or NRE account after tax deductions.

Why Should You Invest in Mutual Funds?

One of the main advantages of investing in mutual funds is that they offer portfolio diversification, helping to minimise risks. Additional reasons to invest in mutual funds include:

• Mutual funds are managed by professional fund managers, allowing you to benefit from expert investment management.
• Mutual funds without any lock-in offers easy liquidity, wherein you can invest or redeem on any business day.
• As the minimum amount to invest in mutual funds is often low, it is suitable for all investors.
• Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), ensuring investor protection and transparency.

What is the Cost of Investing in Mutual Funds?

There are several costs that you incur on your mutual fund investments over the investment tenure. Here are the different costs that you might incur:

• Management Cost: Mutual funds deduct a fund management fee from your returns on a day-to-day basis.
• Exit Load: Mutual funds levy an exit load on redemption before a specific tenure to discourage short-term investments.
• Expense Ratio: It includes brokerage costs and other expenses for investing in a mutual fund.
• Selling Costs: Selling costs include Securities Transaction Tax (STT) and stamp duty payable to the government for mutual fund transactions. 

Final Word

Now that you know how to invest in mutual funds, choose the right platform wisely. Regular mutual funds involve higher distributor costs than direct investments. For secure, predetermined returns, consider SEBI-regulated mutual fund options via Stable Money, offering up to 14% per annum. Download the app now and start your investment journey!