A beginner's guide to mutual funds

Mutual funds are a well-diversified, low-cost and tax-efficient way of growing your savings. They are an ideal investment option for those who do not have the expertise for stock investing. You simply invest in a fund, and the fund manager will do the job of picking the stocks that they think will yield good returns. Despite their simplicity and suitability for small investors, they are not the preferred investment option for the vast majority of Indian investors. They are either not aware of them or find them too complex to understand. If you happen to be one of them, here is a primer that should help you start investing in mutual funds with ease. It summarises the key steps in your journey and explains all you need to know to get started. 1. Getting ready: There are a few one-time prerequisites to start investing in mutual funds. You need to have a bank account and you must be KYC (know your customer) compliant. KYC is the process of verifying the identity of an investor. It's free and just requires your passport-sized photograph, PAN and Aadhaar Card. Also, you can check your KYC status. If you haven't yet registered for KYC, you can apply for it in two ways - offline and online. An offline KYC can be done by filling out a form which is available on the websites of Registrar and Transfer agent (CAMS/Karvy) and all the mutual fund houses (AMCs). You can also get your KYC done in just five minutes by filling out an online form on the website of AMCs or RTAs. You need to provide your registered mobile number and Aadhaar number for verification via OTP. Your in-person verification (IPV) is done via video call, where you have to show your original identity and address proof. Once the verification is done, you are all set to invest. 2. Choosing mutual funds: Mutual funds are meant to simplify the job of investing for you. But ironically, the task of choosing the right funds can become overwhelming, given that you are faced with more than 2,500 fund schemes to choose from. Here are the decision points you'll be confronted with and here's how you can make the right choices with ease. a. Debt or equity funds Referred to as the asset allocation decision, this is basically where you decide whether and how much you should invest in fixed-income securities and in equity shares. Both are meant to fulfil different needs. Debt funds offer steadier but offer lower returns. Given their low-risk, low-return profile, they are

This article was originally published on December 03, 2021, and last updated on July 29, 2024.