How to invest in Mutual Funds in India?

How mutual funds work? Benefit of Mutual funds. How to invest in Mutual Funds in India?

Mutual fund is a form of investment just like stocks, Gold or real estate. But what makes it special is that it uses money from investors to invest in other types of investment like stocks, bonds etc. A fund manager or portfolio manager in charge of the funds decides how to invest the money most profitably in different types of securities

What makes Mutual funds special? Mutual fund is an investment option through which you could invest in various market instruments like Stocks, Bonds, Exchange traded Funds (ETF) etc. It is simply a basket of funds that is managed by a professional fund manager. The difference between stocks and mutual funds is that in the former, you will directly invest in a particular company whereas the latter is a fund that is invested in a collection of instruments. Certain mutual funds may invest in Stocks, some may invest in bonds and some may invest in a variety of instruments. Mutual funds are not entirely risk free. They are dependent on market situation like stocks. However, compared to stocks, they are relatively safe since the risk is distributed equally among the instruments. Even if a particular company’s stock within the fund performs badly, another company’s stock will perform better. Similarly, in case of a fund invested in a variety of instruments, even if the stocks perform badly, the bonds may perform fairly well.

Further, investing directly in stock market requires knowledge of industry and the capital market. You need to know when the market will be bullish. In case of mutual funds, the company’s experts will take care of this problem.

Good returns: There are mutual funds that have returned an average of 20% each year. For example, Reliance Growth Fund, a midcap fund has returned handsome returns over the past 10 years. Birla Sun Life Advantage Fund is another example

Beat inflation: Mutual funds are a great way to beat inflation. You may get returns in other investments but they may be nullified by the effect of inflation. For example, if you invest Rs 1000 in a Savings bank account and the bank offers an interest rate of 5%. Your investment will become Rs 1050 after a year. However, if at this period inflation is at 5%, the interest you earned will be nullified. Hence, mutual funds are an ideal investment for long-term inflation adjusted growth

Low cost investment: Mutual funds are ideal for young investors. Through mutual funds, you can invest small amounts of money. In case of stocks, you will need to invest a substantial amount in order to benefit from the slight movement in the prices. Also it’s a volatile investment that may keep off new and young investors.

Transparency: Investing in mutual funds is transparent. Fund managers have to provide regular information about the current value of investment, and their future strategy in order to give a clear picture to customers

Net Asset Value (NAV): NAV represents the assets of a mutual fund, minus its liabilities. When you invest in a mutual fund, your investment will be allocated a certain net asset value. The percentage increase in the fund’s NAV will determine the actual increase in the value of your investment

Index mutual funds: Index funds work similar to Exchange traded funds. Index funds are equity funds that track a particular equity index and invest in the same. For example, if TATA Motors Company has 10% weightage in an equity index, a fund based on the index would also invest 10% of its portfolio in the TATA motors stock. Index mutual funds eliminate fund manager risk. In cases, people may worry about the ability of fund managers. Opting for index mutual funds is a solution to overcome this issue

How can you make money using a Mutual fund? Basically, there are two ways through which a mutual fund gives profit. First, you could sell the fund and get a capital gain. Secondly, you could keep the fund and continue to receive distributions of dividends, interest and capital gains etc that the fund accrues on its investments.

Income generated through mutual funds is subject to taxation.

How to enroll for a mutual fund? If you already have a demat account, you can use it for mutual funds as well. All stock brokers are linked to BSE and NSE mutual fund platforms. Alternatively, you can enroll with an AMC (asset Management Company). You can download the relevant forms their websites. You need to submit details like KYC (Know your customer) and PAN card number.

Costs involved with a mutual fund include management charges levied by AMCs. Brokers may levy brokerage charges

Top performing mutual funds in India: Some of the best performing mutual funds over the last 5 years are Franklin India Blue Chip fund, HDFC Equity, Birla Sun life Advantage Fund, Reliance Equity, ICICI Pru Balanced fund etc