Mutual Fund investments are on a roll. Here’s a simple guide for first-time Mutual Fund investors.
Mutual Funds are getting increasingly popular among Indian investors. The efforts of the financial industry and online platforms like BankBazaar to make people aware of personal finance products, especially in remote towns, is finally bearing fruits. A recent report showed that asset base surged to Rs. 4.27 lakh crore in 2017-18, up 38 percent from the preceding financial year in smaller towns. The rise in the numbers indicates an impressive growth in mutual fund investment.
Mutual Funds are now a popular investment tool in both small and metropolitan cities. If you have not joined the Mutual Funds bandwagon yet, here’s how to do it.
What Are Mutual Funds?
These are professionally managed investment schemes where an Asset Management Company (AMC) invests the pooled money from several investors in different securities like stocks, bonds, deposits, derivatives, gold, commercial papers, money market instruments, etc. You can purchase a mutual fund through a distributor or directly through an AMC.
You get the profit as capital appreciation with the option of receiving an additional dividend net of the charges—known as total expense ratio—you pay to your fund manager for his services.
The unit price of a mutual fund is known as its Net Asset Value (NAV), calculated at the end of every trading session.
If you are keen to invest in mutual funds, then below is a five-point guide for you.
How To Invest
With the launch of paperless mutual funds platform by online financial marketplaces, investing in mutual funds can now be done at the click of a button. For first time investors, paperless has simplified the process of assessing, selecting and purchasing financial products instantly through OTP-based eKYC.
You can also take the help of a professional and hire a mutual fund advisor. The advisor will be handy in dealing with formalities and will help you in understanding schemes. However, if you do not have any knowledge about Mutual Funds, then do not go solo as the chances of losing money are quite high.
How To Choose A Fund
There are thousands of Mutual Fund schemes in the market. Like any other investment, your fund selection would depend on your set goals/objectives. Once you identify your short-term and long-term goals, you can direct your investment towards achieving these objectives. If you are looking at a short-term goal—something which should be achieved in a couple of years—then you must opt for short-term Debt Funds.
Equity funds can give a good return compared to other funds to people with a long-term goal of buying a house or a car. So, the thumb rule is to identify your goal first before you identify the right Mutual Fund for it
Risks & Rewards
You must invest as per your risk tolerance. Most Mutual Funds carry risks related to market volatility, interest rate change, ratings, currency exchange rate etc. The higher risks you take, the higher your rewards can potentially be in the long term. For example, liquid Mutual Funds have a CAGR of 6-8% in recent years, whereas large-cap equity Mutual Funds have a CAGR of 12-15%.
But while liquid funds are not volatile, equity funds track the movement of stocks, which go up and down on a daily basis. As a thumb rule, you should invest in liquid funds for a short-term goal, and equity funds for a long-term goal.
How Will You Be Charged?
Another important aspect which a first time mutual fund investor should be aware of is charges or fees you will be paying to a Mutual Fund house while investing. Mutual Fund investments come with exit load and expense ratio, which are deducted during redemption. If the investment is for a certain tenure—for example, one year for equity mutual funds—then the exit load may be waived off.
AMCs charges an expense ratio that includes administration fee that covers their salaries, brokerage, advertising and other administrative expenses. If the expense ratio is lower, the cost of investing in that Mutual Fund will be lower too and vice-versa.
How Will You Be Taxed?
Both debt funds and equity funds have different taxation rules for both Short Term Capital Gains and Long-Term Capital Gains. In debt funds, STCG tax applies on units held for less than three years before redemption. The gains here are combined with your income and taxed as per slab. It is 20.6% with indexation benefits if the units are redeemed after three years. Whereas for equity funds, for units held for less than one year, STCG is applied and is taxed at 17.16%. After this year’s budget, for equity funds, LTCG will be applied on units held for one year or more and taxed at 11.44 % without indexation.