How do Mutual Funds work - A detailed explaination!

A mutual fund is formed when an asset management company (AMC) pools investments from various individuals and institutional investors with common investment objectives. A fund manager professionally manages the pooled investment by strategically investing in securities to generate maximum returns for the investors in line with the investment objectives of the fund.

Fund managers are professionals with an excellent track record of managing investments and have an in-depth understanding of markets. The fund houses charge an expense ratio, which is the annual fee to manage the mutual fund.

The investors make money through regular dividends/interest and capital appreciation. They can either choose to reinvest the capital gains via a growth option or earn a steady income by way of a dividend option. 

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Why should you invest in Mutual Funds?

Convenience

Investing in Mutual Funds is a paperless and straightforward process. Investors can monitor the market and make investments as per their requirements. Moreover, switching between mutual fund schemes and portfolio rebalancing helps to keep returns in line with expectations.

Low initial investment

You can build a diversified mutual fund portfolio by investing as low as Rs 500 a month through SIP in mutual fund schemes of your choice. You also have the option to invest either as a lump sum or a systematic investment plan (SIP). However, when compared to lump sum investments, a SIP is capable of lowering the overall cost of investment while unleashing the power of compounding benefit.

Tax-saving

You get tax deductions under Section 80C of the IT, Act up to a maximum of Rs 1.5 lakh per financial year, for specific financial instruments, and tax-saving mutual funds are one of them. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for Indians in the last few years, owing to its higher returns and the shortest lock-in period of three years among all Section 80C options.

Professional fund management

Your mutual fund investments are managed by a professional fund manager who is backed by a team of researchers. The fund manager formulates the investment strategy for your asset allocation. The team of researchers picks suitable securities as per the fund’s investment objectives.

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Things to Consider as a First Time Investor

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Fix an investment goal

Defining your financial goals, budget, and time horizon plays a significant role in your investments. Doing this will help you decide how much you can set aside towards investing and you must also invest based on your risk profile. Investment always works best when done with a purpose.

Choose the right fund type

It takes more than reading about different mutual fund types to decide on the right category. Experts typically recommend a balanced or debt fund for first-time investors as it comes with minimal risks while offering steady returns. With a plethora of mutual fund schemes in each category, you need to analyse and compare them to pick the right investment. Investors should not ignore factors such as the fund manager’s credentials, expense ratio, portfolio components, and assets under management.

Diversify your portfolio

Consider investing in more than one mutual fund to diversify your portfolio and earn risk-adjusted returns. A portfolio of funds will help you diversify across asset classes and investment styles. It will also even out risks – when one mutual fund underperforms, as the other funds makes up for the loss maintaining the value of your portfolio. 

Go for SIPs instead of lump-sum investments

Investing via systematic investment plans (SIP) is advisable for those investing in equity instruments for the first time. While a lump sum investment can put you at the risk of catching a stock market peak, SIP allows you to spread your investments over time and invest across market levels. The benefit of rupee cost averaging that comes with SIPs also helps you average out the cost of your investment and earn higher returns over the long-term.

Keep KYC documents updated

You cannot invest in a mutual fund if you have not completed the Know Your Customer (KYC) process. KYC is a government regulation for most financial transactions in India to identify the source of funds and prevent money laundering. To become KYC-compliant, you need a PAN card and valid address proof.

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How to Invest in Mutual Funds?

You can invest in mutual funds in a paperless and hassle-free manner at Clerk and Clerk Finvest. You can download our mobile app or login to our website to create the account and transact online. 

Call our Mutual Fund Helpline on +91-7019832456.