Mutual funds investment is considered one of the best and simplest methods for long-term wealth creation by investors. It is a tax-efficient way to make your savings grow. Those who have no expertise in stocks can benefit through the potential returns gained in mutual funds. Today, mutual fund investment is a much better option on risk reward basic than fixed deposits and gold. SE we have created this Guide to mutual funds for beginners in India.
Though investing in mutual funds is simple, many find the whole process too complex to comprehend and others perceive it as risky which it is not. Here’s a guide to mutual fund for beginners in India. Which will give you a good idea of what are mutual funds, the types of mutual funds, and the benefits of investing in mutual funds.
Mutual funds can be understood as a process in which money is collected from different investors who have common financial objectives or goal. The collected fund is than invested on there behalf in diversified assets as specified in offer documents at a low cost to meet the mutual financial target set by investors. The professional fund manager manages the mutual fund scheme in an effort to generate positive returns. So lets get started with our guide to mutual funds for beginners in India.
Types of Mutual Fund investment:-
There are different types of mutual funds available for investors in India. Broadly speaking, mutual funds are categorized into:
- Investment and redemption or sale is possible at any time as there is no fixed maturity or lock-in period.
- Investment can be done for a short period of time usually when NFO or New Fund Offer is launched. It has a fixed maturity period.
- Investment and redemption can be done at pre-determined intervals or dates.
Depending on investment objective, mutual fund schemes are divided into growth/equity-oriented schemes, income/debt-oriented schemes, hybrid funds, liquid funds, gilt funds, index funds, global funds, and debt funds.
A wide range of mutual fund types is available based on the risk you are willing to take and the returns you are expecting. There are several best mutual funds to invest in Lumpsum or SIP where you can invest a fixed sum in a scheme.
Why Choose Mutual Funds Investment?
There are several benefits to investing in mutual funds investment than equities and other forms of investment. A few of them are briefly discussed below:
A mutual fund is a smart investment option as the risk is low when compared to directly investing in the stock market. The security offered by banks is an advantage and schemes are spread in diverse assets.
Professional and expert fund managers take care of the mutual funds. There is a whole team of board of directors, agents, accountants, auditors who monitor and make decisions using the latest technology and tools and also keeping investor objectives in view.
Mutual funds are diversified across the fund’s portfolio. This allows you to invest in funds that are high risk but great returns, low risk but low returns, and so on.
Investors can avail of tax benefits with Equity-linked Mutual Funds under section 80c of the Income Tax Act in India.
Easily track the performance of the funds over a period of time. Compare with other funds and check if it is achieving the objectives. This quick guide on How to invest in mutual funds for beginners in India must have given you a good overview of mutual funds.
Therefore, do not wait anymore and start investing in mutual funds.
Now let's take a look at some trading rules for Mutual Funds Investment:-
A guide to mutual fund Trading Rules:-
Investment in mutual funds is far different than buying shares or equity. It is a far simpler process and now with digital development, the process becomes far simpler. A basic understanding of the buying and selling of mutual funds can help you with the process in a systematic manner and you will be able to get the most out of your investment.
How to buy a mutual fund?
Mutual funds can be purchased through different routes.
- Offline route: Here investors have to fill up the forms and do payment through cheque/ RTGS route and handover to the company or distributor.
- Online route: Here investors have to put buy orders and pay the money online. The units will be purchased for the investor as soon as the money is received by the fund houses.
Both the route are available by different channel partners. The fund house or AMC itself can collect and do the transactions. The channel partners like banks, national distributors, individual financial distributors, broking houses can act as collecting agents and helps investors to mutual fund trades. In India, unitholders do KYC before investment.
Mutual fund investment minimum amount normally for equity and hybrid funds is Rs. 5000 and in debt funds, it is varied in the range of Rs. 5000 to Rs. 25000. Note not all funds are set any minimum amount.
As we talked about types of funds where close-ended funds come. Those funds are not available for investors to buy fresh units. These close-ended funds units are in India are tradable on stock exchanges like shares (very low volumes) by which existing investors can move out as well as new investors can buy those mutual fund units.
The mutual fund units are held by custodians. We can hold mutual fund units in the form of physical form or in the demat form. The process of buying and selling is different for both the form of purchase. When we are purchasing into demat mode it should be purchase by specifying your demat account in the offline segment. In the online segment, the purchase is also done through the MF platform where it allows to tractor into demat form.
Do own your Research before finalizing the fund:
There are more than thousands of funds are available for investment. Every investor has a different goal and different risk appetite, so please do proper analysis before investing in a fund.
As per the regulator, SEBI, each fund is classified on risk o meter depending on the risk of the scheme. These risks are as below: Low, Moderately Low, Moderate, Moderately High, High, and Very High.
When you are investing you have to remember golden rule of Diversification means not keeping all money in one particular scheme or category. When you are planning to invest don’t only consider equity options but you can consider others like debt, hybrid, and multi-asset segments also.
Nowadays most of the channel partners along with independent rating agency provides the information of particular scheme or funds in which you want to invest. But when you are planning to do an investment you first visit the fund house website. There you will be able to see not only the performance of the scheme which you want to invest in but also the performance of the fund manager across other schemes he is managing. Also the investment strategy, top sectors, top holdings of the scheme. Some of the fund houses provides also graphical representation too.
After the fund house website, an investor can consider his/her investment partner who will provide additional information as a comparison along with the analyst view as well as suggestions.
Mutual Fund Buy – Trading
Mutual funds are bought and sell a very easy way but they are not tradable like shares or Exchange Traded Fund (ETF) which have real-time prices. Mutual funds calculate the Net Asset Value (NAV) of each scheme after the closing of the market. They calculate the total asset in the portfolio and divide it by a number of units to come out for NAV which is in simple form as market price.
If the units want to purchase in demat form then the broker has to buy the order on the platform with demat mode. On the same day, the broker has to transfer the funds to the fund account. On the next working day, the units were allotted and on the second working day, those units come to the investor’s individual demat account from the broker’s account. Here the money flows from investor to broker and broker to fund house via exchange.
The mutual funds which you had purchased will be handover the number of units to you on the day’s NAV. Normally mutual funds allow a fraction of units also.
For Example – If an investor invests Rs. 10000 and the fund NAV of that day was Rs. 210.245 then the investor will receive units = 10000 /210.245 =47.5636 units
The fund house charges normally annual expense ratio which on daily charge as amortized. Previously in India fund houses were charging entry load which was normally used for paying the commission or brokerage to the distributors.
There is exit load is applicable for the different funds as prescribed by the scheme or fund houses from time to time. Those selling or redemption act as penalties of exit load to investors.
Trade and Settlement dates:-
The date when you place your order to purchase or sell mutual funds is called the trade date. However, the transaction is not finalized, or settled, until it transferred units to the investor name and funds to the fund houses.
Trades happen when the order is placed, the NAV will be applicable on the day when the fund house received the funds into there bank account before the cut-off time. After the fund receipt, the day NAV is applicable and the investor received the units in electronic form in demat or in the folio or account if it is physical form applicable.
Selling Mutual funds:-
The process of selling the mutual fund is as simple as buying or even simpler. Nowadays due to online even physical purchases can be sold with one click. The funds can sell the same way through a fund house or through a channel partner.
As soon as you put the order the units before the cut-off time the same-day NAV will be an applicable minus if any load or charges are applicable. The investor will receive the amount that will be equal to a number of shares multiplied by the applicable NAV with the load.
If units are held in demat than investors have to tractor those units on the same day prior to 4.00 pm to exchange pool account. The broker will put sell orders and on the same day after receipt of units from the investor’s individual demat account exchange confirmation to sell or repurchase units. Here the cash flow is from exchange to broker and the broker tractor the amount to the investor’s bank account.
An investor can redeem by a number of units or by amount also too.
For Example – If the investor redeems 50 units and the fund NAV of that day was Rs. 208 than the investor will receive amounts = 50 * 208 =Rs. 10,400
In mutual funds, if the units are sold before the lock-in period than it will attract exit load or CDSC charges. There are other charges also applicable like STT charges if the fund is equity-oriented and so on.
If you sold any mutual fund units, it will attract capital gain for the unitholders. The profit and loss will be depending on the time frame of the investor hold and which segment. In India, equity-oriented funds attract long-term capital gain tax if they hold more than 365 days or a year while if it is below that then short-term capital gain will be applicable. In debt oriented mutual fund the short term is below 3 years and the long term is beyond 3 years. The capital gain tax will be applicable and each unit holders have to pay off the taxes.
This is normally the mutual fund trading process for investors to invest in India.
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