All You Need to Know About Investing in Mutual Funds- for Beginners

Finance


27 October 2020

All You Need to Know About Investing in Mutual Funds- for Beginners

Investments ensure the long-term financial security, which is why investing a portion of your earnings is one of the most important things you can do. Aspiring Indian professionals of today recognize that along with contributing to a financially secure future, investments can also be a steady source of income. Their returns can be channeled into several financial goals. And when investments fall short, there are always comprehensive solutions like the EarlySalary Credit Suite ready to serve them.

Mutual funds are a diversified way of growing your savings while also minimizing tax liability. In the past decade, they’ve become a mainstream investment option, with people from a wide range of financial backgrounds putting their faith in them. 

However, there are still people who are willing to invest in mutual funds but are hesitant on how to proceed. Worry not, though. In this post, we’ve compiled all the information you need to know before making your first mutual fund investment. 

What are Mutual Funds? 

First things first: a mutual fund, in case you’re unaware, is an investment instrument where you put in your money for increased profits. Your investment is pooled with those from other investors and managed by a group of skilled financial experts. 

Mutual funds are overseen by an asset management company – or an AMC. The AMC takes funds from the investors and channels them into a varied assortment of assets (stocks, bonds, commodities, etc.). The returns are distributed in proportion to the investor’s contributions.

There’s a broad selection of mutual funds available for investors to choose from as per their goals and risk appetite. Now, we’ll be taking a look at some of the conventional types of mutual funds. 

What Are the Different Kinds of Mutual Funds? 

Mutual funds are sorted into different categories based on quite a few factors, including but not limited to the asset class, their maturity periods, and fund structures.

Based on the asset class, mutual funds can be generally divided into the following categories:

  • Equity, or Stock Funds: 

By far the most popular mutual fund type among investors, equity funds invest in the stocks of different companies. Equity funds themselves can be divided into several categories based on the sort of equities they invest in. For instance, based on the size of companies being backed up, equity funds can be large-cap, mid-cap, and small-cap.

The SEBI (Securities and Exchange Board of India) has sanctioned 11 categories of equity mutual funds, such as Multi-Cap funds, ELSS (Equity Linked Saving Schemes) for tax benefits, and more.

  • Debt, or Fixed Income Funds: 

A debt mutual fund generates interest income by investing in instruments such as government bonds, corporate bonds, etc. SEBI has listed 16 types of debt funds in total. For example, short-duration funds, liquid funds, Banking & PSU Fund, etc. 

These invest in both debt and equity MFs, as well as other related instruments. Hybrid funds aim to strike a balance between risk and good returns.

The SEBI categorizes hybrid mutual funds into 7 kinds, such as the Conservative Hybrid Fund (investing in debt), the Aggressive Hybrid Fund (investing in equity), Balanced Hybrid Fund, and more.

Mutual funds based on maturity period: 

  1. Open-Ended Funds: Open-ended mutual funds allow investors to buy units or sell their holdings whenever they want to. There’s no fixed maturity period. Most mutual funds available in the market right now are open-ended.  
  2. Close-Ended Funds: Close-ended mutual funds have a specific maturity period. Investors can only invest before the fund launches and cannot withdraw their money at any point of time during its run. 
  3. Interval Funds: Interval funds bring together some of both open-ended and close-ended funds’ characteristics. They allow investors to trade units at predetermined intervals during the fund’s run time.

Modes of Investment in Mutual Funds:

There are several methods to invest in a mutual fund scheme, although the most popular are:

  1. Lump-Sum Investment: Through a lump sum investment, you can invest the entire amount in one go.
  2. SIP: With a SIP, or a systematic investment plan, you can deposit a fixed amount at regular intervals.

How to Choose the Right Mutual Fund for Yourself

Before you select a mutual fund for yourself, consider the following factors:

  1. AuM, or Assets under Management: This is the total value of assets a mutual fund holds at any given point.
  2. NAV, or Net Asset Value: The NAV is the value per unit of a particular mutual fund at a specific point in time. Whenever there is a change in a funds’ asset value, the NAV shifts, thus determining whether there’s profit in the investment.
  3. Expense Ratio: The total estimation of the fund management fee, and the additional costs of running a mutual fund. The annual operating fees are a small annual percentage (1% to 3%) of the invested funds.  
  4. Entry Load: The fee charged when you make an investment in a mutual fund. 
  5. Exit Load: The fee charged for redeeming holdings before a specific time period. 
  6. Lock-in Period: The time period for which you cannot withdraw your investment. The lock-in period begins on the date of investment, or may not exist at all.
  7. Holdings: The contents of an investment portfolio of a mutual fund. For instance – all the companies whose stocks are bought by an equity scheme.
  8. Date of Inception: The date on which a mutual fund was launched would help you evaluate its performance over specific periods of time.
  9. Returns: Checking the profits/losses of a mutual fund scheme over certain time periods (e.g., 1 year, 3 years, 5 years) would help decide if you should invest in that scheme.
  10. Risk: Find out what kind of risk a mutual fund scheme anticipates to see if it matches your risk appetite.  
  11. SIP: If you plan to start a SIP, find out the minimum SIP rate for the MF plan.

How Are Returns from Mutual Funds Taxed in India? 

Your earnings out of a mutual fund investment count as a form of income (capital gains) and therefore are taxable. Depending on your MF scheme and the duration of your investment, your payable tax would vary. 

The tax rates for equity and debt funds – two of the most sought-after MF schemes – are listed below:

Mutual
Fund Type
Short-Term Capital
Gains Tax
Long-Term Capital
Gains Tax
Equity
Funds
15%10%
(without indexation)
Debt
Funds
According to
your income tax slab
20%
(after indexation)

How Can You Make a Mutual Fund Investment? 

There are quite a few ways you can invest in a mutual fund. Here are the most common ones:

  1. Online Portals
  2. Directly through the AMC
  3. Through an Intermediary

And there you have it, a guide to mutual fund investments that will hopefully be of help! While this was by no means comprehensive, we do hope it’s given you the knowledge you need to start out as a mutual fund investor and plan your investments better. For all other needs, there’s the EarlySalary Credit Suite!

Happy investing!

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