Mutual funds have become a popular investment option for retail investors in India. At the end of March 2024, the total assets under management (AUM) in the mutual fund industry stood at nearly ₹53.40 lakh crore compared to ₹39.42 lakh crore in March 2023, marking a significant increase of 35%. The AUM of the Indian mutual fund industry has grown by 124% over the last five years since March 2019. Additionally, in March 2024, Systematic Investment Plan (SIP) contributions rose by 35%, reaching ₹19,271 crore compared to ₹14,276 crore in March 2023.
These numbers reflect growing investor confidence in mutual funds. However, many people still struggle to understand how to start investing in mutual funds, and some are unaware of the benefits these investments can offer.
In this blog, we will cover everything you need to know about mutual funds, focusing on how to invest in them online.
How Do Mutual Funds Work?
A mutual fund pools money from a large group of investors who contribute collectively for their shared benefit. A fund manager manages these funds with the support of analysts and experts who assist in making investment decisions. The fund may target objectives such as capital growth, consistent income, preservation, or tax benefits. Based on these objectives, the fund manager allocates the money across various financial instruments, such as equity and debt.
The fund allocates units to investors in proportion to their contributions. A unit acts as the basic building block of a mutual fund.
Investors buy specific units through a mutual funds app based on their investment amount. For this reason, investors are often referred to as ‘Unit Holders’. The fund calculates net returns by deducting taxes, research expenses, and administrative costs. The fund expresses the value of each unit as the Net Asset Value (NAV).
Why Invest in Mutual Funds?
Here’s a summary of reasons why you can consider investing in mutual funds:
Affordable
One key attraction of mutual funds is that you can start with a minimal amount. With SIPs starting as low as ₹500 per month, mutual funds provide a foundation for long-term investment objectives. Opting for direct plans may reduce brokerage and commission expenses, saving you additional costs.
Professional Management
Mutual funds are handled by experienced professionals who conduct in-depth research and track market movements. They carefully curate your portfolio by selecting the right stocks and executing trades optimally to maximise returns. By investing in a mutual fund scheme, you can benefit from the expertise of seasoned fund managers.
Higher Returns
Mutual funds can offer significantly better returns than other low-risk investment options. These investments are not static and can quickly diversify to suit an investor’s risk appetite.
Convenient
With the digitalised KYC process, investing in mutual funds has become simpler, quicker, and more efficient. Many fund houses offer online investment platforms, making investing in mutual fund schemes seamless and one-click.
Disciplined Investing
Systematic Investment Plans (SIPs) foster a disciplined approach to mutual fund investing. Through SIPs, you can invest small amounts at regular intervals with flexible frequency. Investors can activate an auto-debit feature for SIPs, ensuring a fixed amount is deducted monthly from their account.
A Simple Step-By-Step Guide to Investing in Mutual Funds Online
Now that you are familiar with mutual funds, we will walk you through the steps to start your online investment journey.
Select a Reliable Platform
Your first step is to choose an online mutual fund investing platform or demat app. Numerous platforms are available, and the one you choose should be secure, easy to navigate, and highly rated by other users. Many apps or platforms provide features such as access to a broad range of mutual funds, tools to monitor your investments and options for automating contributions.
Consider a platform with excellent customer support and an intuitive interface. Some popular apps allow direct investments in mutual funds, eliminating the need for intermediaries. Before making your choice, take time to compare platforms and read user reviews.
Set Up Your Account
Once you have picked a platform, the next step is to create an account. Typically, this process requires basic information such as your name, phone number, email, and Permanent Account Number (PAN). As per Indian regulations for financial investments, completing the KYC (Know Your Customer) process is mandatory.
The KYC process usually involves uploading documents like your UID card, proof of address, and a passport-sized photo. After your KYC is successfully verified, you can start investing.
Decide Your Investment Approach: SIP or Lump Sum
When investing in mutual funds, you can choose between two standard methods:
- Systematic Investment Plan (SIP): This approach involves regularly investing a fixed amount (often monthly) in mutual funds. SIPs are ideal for beginners as they promote disciplined investing and require smaller amounts. Over time, this method helps build wealth steadily.
- Lump Sum Investment involves investing a sum of money in one go. It’s often preferred by experienced investors who have significant funds available for immediate investment.
Both approaches have their own merits. SIP may help average market volatility over time, while lump sum investments can allow you to capitalise on market opportunities with a larger one-time contribution. Choose based on your financial goals and available resources.
Pick the Right Mutual Fund
After deciding your investment type, the next step is choosing the mutual fund that aligns with your financial objectives. Mutual funds are usually categorised based on their investment focus:
- Equity Funds: These funds are primarily invested in stocks. They have the potential for higher returns but carry greater risk. Therefore, they can be better suited for long-term investors comfortable with market fluctuations.
- Debt Funds: Invest in fixed-income instruments like bonds and government securities. They are relatively safer but may offer lower returns than equity funds.
- Hybrid Funds: These funds, which mix equities and debt instruments, provide a balanced risk-reward ratio, making them suitable for moderate risk-takers.
- Index funds track specific indices, like the Nifty 50 or Sensex, and are usually low-cost options offering market-matching returns.
When selecting a mutual fund, consider your risk appetite, investment horizon, and financial objectives. Many online platforms provide tools to compare funds, helping you make informed decisions.
Start Investing and Monitor Progress
Once you have selected your mutual fund, the next step is to invest. Online platforms can simplify the process. You just need to specify the amount you want to invest, whether you choose SIP or a lump sum and confirm the transaction.
Post-investment, it’s essential to monitor your portfolio regularly. Most apps usually offer features that let you track your investments and assess their performance. You can also set up notifications to stay updated on significant changes in your portfolio.
While mutual funds are typically long-term investments, monitoring them ensures that you can adjust them as needed, such as reallocating funds or tweaking your SIP amount to stay aligned with your financial goals.
Reassess Your Investment Plan Regularly
Investing in mutual funds is not a one-and-done process; your investment strategy must be reviewed periodically. Evaluate your portfolio based on your financial goals and any changes in your financial situations, such as a job change, marriage, or nearing retirement.
Most demat apps make adjusting your mutual fund investments easy. You can also switch from one mutual fund to another, ensuring your investments align with your evolving financial plans.
Conclusion
Investing in a mutual fund is not rocket science. It’s a simple process when you understand the basics and follow the steps. You can align your investments with your financial goals with careful planning and research.
Start small, stay consistent, and monitor your portfolio regularly. Mutual Funds can be an effective way to grow your wealth over time while diversifying your investments.
You can Open Demat account and invest in a Mutual Fund With HDFC SKY. Begin today and take a step towards building a brighter financial future.