Ultimate mutual fund investing guide | Value Research Mutual fund investing guide: Read to know the types of mutual funds and a step-by-step guide to your first mutual fund investment.
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The ultimate guide to mutual fund investing

Read on for a step-by-step tutorial on your first mutual fund investment

Mutual funds are a convenient investment avenue that helps you build wealth. They allow you to invest in a wide variety of stocks and other securities at a much lower cost than investing in them directly. In mutual funds, there are professional fund managers who do the work for individual investors and relieve them of the worry of where and how to invest, etc.

For individual investors who don't have the time to study and research investments, mutual funds are the best option for reaping the benefits of diversified investments with minimum effort. In most funds, it is possible to start investing with as little as a few hundred rupees. Unlike many other investments, mutual fund investments are generally liquid and can be redeemed without any delay. Here is everything you need to know in order to kick-start your mutual fund journey.

Types of mutual funds
There are three broad types of mutual funds:

  • Equity schemes: These are the schemes that predominantly invest in stocks. They are further classified based on their exposures to different market capitalisations. Equity helps you earn high returns but it also fluctuates in the short-term. However, this volatility falls drastically over longer investment horizons. Hence, your ideal time horizon should be five years or more. Equity funds are the most suitable for creating wealth in the long-term.
  • Debt schemes: These funds invest in securities such as corporate bonds, government securities and other instruments that provide fixed income. Given their low-risk, low-return profile, they are a suitable choice to meet short-term goals where capital preservation takes precedence over return potential.
  • Hybrid schemes: These schemes combine equity and debt investments in a certain ratio. Their charm lies in being less volatile than pure equity schemes. They participate when markets go up, and fall less sharply when markets fall, due to the cushion provided by the debt portion.

All in all, there are hundreds of mutual fund schemes in India. Securities and Exchange Board of India (SEBI), the capital markets regulator, formulated a fund classification system in October 2017 which categorises funds according to their investment characteristics. There are 37 official categories with 11 in equity, 16 in debt, 6 in hybrid and a few others which cover solution-oriented schemes and passive funds. However, Value Research has been classifying funds for a long time based on their underlying investments. Though our own classification system was quite similar to the one mandated by SEBI, we fine-tuned it to align more closely with that of the regulator.

Nonetheless, we believe most investors can do only with a handful of categories. And for starters, the choice is rather simple as we will see in the next section.

Where to invest?
If you are a beginner, the focus should be on low risk with a decent return. Once you get the taste of equity investing, you can get into a more nuanced investment strategy. Here are the two most suitable types of funds for those who are just starting out:

  • Aggressive hybrid funds: These funds invest about 65 per cent in equities and 35 per cent in debt. Their advantage is that the equity portion is high enough to give you decent returns but the debt component helps to contain the equity volatility from completely affecting the returns. Softening the risk is what is necessary for new investors so that they are psychologically strong to stay the course and do not end up exiting the fund in panic.
  • Tax saving funds: If you are looking for a tax advantage, tax saving funds or equity-linked savings scheme (ELSS) is also a good option. They are pure equity funds where the majority of the funds' assets are invested in large-cap stocks. However, these funds have a lock-in period of three years. But this works as an advantage for new investors who can't handle the market volatility and also helps one have a long-term view which is the holy grail of equity investing.

Before you invest
Now you might have got a fair idea of mutual fund investing and you're ready to make your first purchase. But before you do, you need to have a bank account and be KYC compliant, which is a one-time procedure. Read how to get your KYC done. Nowadays, you can easily complete your KYC online. Once your verification is done, you are set to invest in mutual funds.

How to invest?
Every mutual fund scheme comes in two variants - a direct plan and a regular plan. There's no difference between the two in terms of fund management or the portfolio. The only difference is the expense ratio charged from the investors, which is a little higher in the regular plan as the fund needs to pay a commission to the agent/distributor. These distributors help investors with mutual fund investing and take care of the investment process on the investors' behalf. If you want to reduce these extra fees, you can go for a direct plan. But remember that you will have to do everything yourself. Read to know how you can go about buying and selling mutual funds.

Further, within both regular and direct variants of each mutual fund scheme, you may also get to choose between two options - Growth and IDCW. In the growth plan, the fund house reinvests all the proceeds, such as dividends received from stocks and realised gains from the underlying assets, back into the fund. Thus, the NAV of growth plans keeps growing with these reinvestments. In IDCW (Income Distribution cum Capital Withdrawal) plans, fund houses pay out some portion of the gains to the unitholders. The quantum of payout and timing is as per the choice of the AMC. So which one is better? We suggest you keep it simple and always opt for the growth option. It is more tax-efficient and gives you more control over when and how much you redeem.

Monitoring and managing your investments
Once you've made your investment, you must keep a track of how well they are performing. It's not necessary to look at them every day. Equity investments are risky, have ups and downs and constantly looking at them adds anxiety, which is not good. Review your investments once or twice a year. You can use My Investments on Value Research to analyse your consolidated portfolio in detail.

You may also use a Consolidated Account Statement (CAS) that reflects your transactions across all mutual fund schemes. You can request a mail-back of your CAS from the website of the RTAs such as CAMS and KFintech (firms that help asset management companies with record maintenance).


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