Looking to invest in Mutual Funds for the first time? Here are 8 vital points to keep in mind before taking the plunge.
Investing in Mutual Funds is fast catching up with youngsters who are keen on growing their money over a period of time. While this is a brilliant way to create wealth for the future, here are 8 important points to keep in mind if you’re planning to invest in Mutual Funds for the first time:
- Know the purpose of your investment: Any financial investment should be preceded by careful thought and analysis, especially if they are market-linked investments like Mutual Funds.
It would be helpful to have a clearly defined purpose of investment, such as buying a car, buying a house, retirement planning, wedding planning, your child’s education or creating a personal corpus. Even if you don’t have a clear goal, you should be clear on how much wealth you are aiming to create and in what time frame.
- Become KYC compliant: To start investing in Mutual Funds, you need to become KYC (Know Your Customer) compliant. One way of doing this is by using the physical eKYC form.
Investors can fill this form, attach their photograph, PAN card copy and a valid address proof such as Aadhaar, passport copy, electricity bill or bank statements. These documents can be submitted along with the first investment form to a registrar or a Mutual Fund office. You can also opt for eKYC if your bank of choice offers that option.
- Take risks into account: First-time investors should choose a Mutual Fund scheme keeping their financial goals, risk appetite and time frame in mind. Higher returns usually come with associated risks. Choose wisely since it is your money and future.
- Selection of scheme and mode of investment: Although one can create substantial wealth with Mutual Funds, it is always advisable to plan for long-term financial goals. If possible, consult a qualified Mutual Fund advisor who can help you draw up an asset allocation plan which can guide you on what percentage you can allocate across asset classes like equities, debt and gold.
- Read the fine print: Investors should read the scheme-related documents carefully and understand the investment objective of the scheme, the exit load or any other charges or fees that the Mutual Fund scheme may involve.
- Keep the costs low: Wherever possible, opt for a direct plan. A direct plan doesn’t require you to pay commission to your bank or advisor out of your investments. The amount you save on commission gets added to your wealth.
- Choose your fund house carefully: As an investor, you are entrusting the fund house to manage your hard earned money, so choose your fund house with care. Decisions taken by the fund house and its fund manager could have a significant impact on the investment performance of the scheme. Check the pedigree of the fund house, management track record and performance of its fund managers before zeroing in on a scheme.
- Do not look only at the past performance of the fund: Financial planners recommend looking at the long-term performance of the schemes they wish to invest in for investors.
They should look at the scheme’s performance over 3, 5 or 10 years. Funds that have consistently beaten their benchmark across time frames are funds that are managed well.
Additional reading: Growth Vs Dividend Option In Mutual Funds: How To Make The Right Choice?
Let’s take a look at some fund categories that first-time investors can opt for:
- Balanced funds: These are hybrid funds which invest in both equity and debt. The equity and debt portions are diversified (in terms of sectors and companies) to avoid concentration of risk.
Equity-oriented balanced funds have 65% or more funds in equities. Equity-oriented balanced funds are tax efficient since long-term (investment of one year or more) capital gains are not taxed. Short-term capital gains are taxed at 15%. Dividends from equity funds are also tax-free.
2. Large-cap funds: Large-cap schemes usually invest 80% or more funds in large companies. This gives stability as stocks of large companies are usually less volatile than that of mid- and small-cap companies.
3. Index funds: This is a type of Mutual Fund with a portfolio constructed to match or track the components of a market index. These funds hold stock in the same proportion as their weight in the index.
They are passively managed, which means that there are no fund managers to increase or decrease holdings. They also have low volatility.
4. Tax-saving funds: Also known as Equity-linked Savings Schemes, this investment is eligible for tax deduction under Section 80C of the Income Tax Act. These are diversified equity funds with a three year lock-in period.
Large-cap oriented ELSS funds are a good option for first-time investors. However, it would be prudent to keep in mind that given the three year lock-in period, any non-performance by the scheme can badly hurt first-time investors.
Additional Reading: Investment Tips: Should You Consider Stocks Or Mutual Funds?
With all these tips in mind, you’re more than ready to take the Mutual Funds plunge. Make the most of your Mutual Funds debut with our carefully curated Mutual Funds schemes.