How to Invest in Mutual Funds: A Step-by-Step Guide


You have made a smart decision by choosing to invest in Mutual Funds. Welcome to a new world of Mutual funds. Investing in MF and equities is a good idea these days since the returns obtained and the tax benefits are generally greater than in investing in mutual funds than investing in traditional avenues such as fixed deposit and PPF.

Investing in mutual funds is easy done than said. SEBI who is a regulator of financial services industry has already simplified the process. However, most of us are unaware of the process of investing in MF. We have tried to detail out the process in simple manner which can guide a layman investor to start investing in Mutual funds-

Step of investing in Mutual Funds

Step 1. Understand your Profile –

There are multiple investment products with different risk and return. When it comes to investing, the first step should be to know personal risk profile. An investor should first understand his or her risk profile for investing. Generally higher the age and financial obligations lower the risk profile. However, one can learn risk profiling through various free online tools.

Knowing the risk profile helps in knowing the products one should not invest in. The below helps to understand the basic categories of profiles and meaning-Risk Profile Investment Style Conservative The primary objective of this class of investors is to protect the capital from loss. Conservative Investors want a stable growth over large returns but without taking any risk on capital.

Generally investors in Higher age bracket or with high financial obligations fall into this category. Moderate These kinds of investors look for capital growth along with decent protection of capital. Investors who lie in this class can tolerate some fluctuations in the short term in the value of their investments in the anticipation of higher returns, in the long term.Moderately aggressive The primary objective of this class of investors is capital growth with calculated risk in the capital.

Moderately aggressive Investors are able to accept fluctuations if long-term expected result is positive and can deliver return higher than fixed deposits. Conservative Aggressive investors can take high risk for supernatural returns. These investors can meet their financial obligations in spite of losses in their investments.

Step 2. Know your financial goals –

Every individual has certain financial goals in life. Some goals are mandatory like retirement expenses, House purchase, kid’s education etc. whereas other can be aspirational one like buying a luxury car, overseas vacation etc. Each Goal has some value and one has the choice to invest a lump sum amount or open regular savings account for meeting the goal.

List down all the financial goals of life.Knowing the amount of money required to meet those goals.Defining how much money should one invest today to achieve those goals. Do Your Goal Planning for Free

Step 3. SIP or Lump Sum –

Knowing the value of goals, one can know how much money one is required to save for meeting those goals.Suppose one needs Rs 50 lacs after 25 years for kid’s marriage, one has to invest Rs 5.80 lacs with expected return of 9%. However, one can start investing in SIP with just Rs 5000 investment per month for 25 years and meet the goal. Depending on the financial capability one can take this decision.

Step 4. Choose the Category of Funds –

There are multiple kinds of funds- equity funds, balanced funds, Income funds, Sectoral funds etc. Each fund is not right for each investor. Now, you have already identified the risk appetite and goal preference, the next important step is to choose the right product. General product selection acceptance is- Risk Profile Fund Mix Conservative Mix of Debt Funds, Gilt Funds, Fixed Maturity Plans Moderate Mix of Balanced Funds, Debt Funds Moderately aggressive Mix of Diversified Equity funds, Balanced Funds and Some bit of mid-cap equity funds Conservative Mix of mid-cap equity funds, sectoral funds & diversified equity However, it is advised not to follow above bifurcation as thumb rule.

Know best Mutual fund schemes in India The following steps will lead to selection of right type of product:

  • Right Mutual fund Scheme – There is 100s of equity funds in India. Once you know that you have to invest in equity funds, now the next step is to identify the right scheme in it. One can take help of advisor for the same or make an effort to do it on his own.
  • Expense Ratio – The Expense ratio is declared as a percentage of basic overall business expenses of mutual fund company ( Known as Asset management company- AMC) necessary to keep the fund operational , over the total investment of mutual fund ( Known as asset under management- AUM ).

It tells how much charges customer pays to the mutual fund company to get the money managed by them. This expense ratio changes for each mutual fund company. It varies for varied mutual fund categories.

  • Historical Performance – Historical performance aids in anticipating the future performance of the fund and hence is looked in during the selection process. The schemes usually with a track record of consistent out-performance vis-a-vis their benchmarks ( usually BSE SENSEX and NSE NIFTY indices in case of Equity Funds), are considered to be good for future too.
  • Mutual fund Scheme Age – Markets have lots of cycles- Bull or bear or stagnant. Funds that perform in all cycles are generally better than others. But cycles come generally in 5-8 year period of time. So it is advised that schemes with 5-8 years of history are generally better than others.
  • The size of the mutual fund corpus – Investors generally invest in the schemes which are good in all aspects- Performance, Ratios, Fundamentals, etc. So one easiest way to judge a mutual fund is to know its corpus and compared with the competition. In case it is on the high side, it can denote that investors trust the particular fund and one can invest. One can easily track the past return from Mutual fund Company’s website or newspapers. However, it is advised to check all above 4 things before investing in mutual funds.

Step 5. Start transacting through online mode or offline mode –

Below listed are the benefits of buying mutual funds online: Factors Online Offline Frequency of paper work One time paperwork is required in the online process.

  • Form has to be filled each time an SIP has to be started Redemption or closure Online Management of SIP- for Closure or redemption One has to follow a cumbersome process for closure or redemption Easiness of tracking
  • Tracking can be done online with portfolio softwares Tracking is difficult since one has to follow through newspapers to track the schemes.Calculation of taxes One can do tax calculations online itself.
  • One has to seek services of a professional to calculate taxes.Time and Stress There is less time involved and lesser stress for the user.There is more time and more stress involved.

Step 6. Sleep –

If you have invested in mutual funds with a proper plan, you should not track them on a regular basis. Mutual funds should be brought for long-term investing and not for timing the market. Therefore, one should forget about the mutual funds investment and not worry about them in the near future after bringing them.

Step 7. Monitor –

It is advisable that one should try to monitor MF account once in every six months. It is said so because by doing so one can know about the status of the funds accumulated through mutual fund and how much more time will be needed to accumulate enough funds to meet the desired goals.


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