Mutual Funds: A Beginner's Guide To Wise Investment Decisions

Read this brief guide to understand the fundamentals of investing in mutual funds and some important points to keep in mind.

<div class="paragraphs"><p>Source: Campaign Creators on Unsplash</p></div>
Source: Campaign Creators on Unsplash

When it comes to investing, mutual funds are one of the preferred investment instruments for a large portion of investors. Mutual funds offer well-diversified options for investors with a low barrier to entry and relatively lower risk compared to purchasing individual company stocks. Moreover, mutual funds are a great choice for amateur investors who do not have intensive knowledge of the stock market to know exactly which company they should be investing in. All investors have to do is invest in mutual funds, and the fund managers pick the right stocks that they believe will provide good returns. However, a large section of the Indian population does not invest in mutual funds, because they are unaware of the basic concepts behind them. However, in recent years, an increasing number of Indian investors are turning to mutual funds as their chosen investment options. So let’s take a look at some fundamentals that investors should know before investing in mutual funds.

What Is A Mutual Fund? Types of Mutual Funds

A mutual fund is a type of investment fund that is managed by a professional wealth management company or a fund manager. Under a mutual fund, the money from a number of investors is pooled together to buy a variety of securities. This helps the fund managers to reduce risk and stabilize regular returns in the process. The fund managers are also responsible for periodically re-adjusting the There are also different types of mutual funds that investors can choose from, such as:

  • Open-ended funds

  • Closed-ended funds 

  • Equity funds 

  • Money market funds/Liquid funds 

  • Fixed income funds/Debt mutual funds 

  • Balanced funds 

  • Glit funds

Points To Keep In Mind While Investing Mutual Funds

Here are some important things that you should be aware of before investing in mutual funds:

Selecting The Right Type Of Mutual Fund

As an investor, the first thing you have to decide is which type of mutual fund you wish to invest in. You must consider many factors for this such as your income, your risk tolerance and the amount of time you wish to invest your money when considering the best mutual fund to invest in.  Financial experts recommend beginner investors to look into debt funds or balanced mutual funds since they are relatively low-risk.

Setting A Budget

Before investing in a mutual fund, you should decide how much you wish to invest into your mutual fund and how frequently. Do not put all of your savings into mutual funds, rather, you should keep your funds diversified. Build an emergency fund, put a portion of your money into mutual funds and then consider other alternative investment options as well for diversification. Consider going with a SIP mutual fund.

Deciding Which Scheme To Choose

Once you’re sure about which type of mutual fund you wish to invest and how much money you are willing to contribute, decide exactly which mutual fund you wish to purchase. This can be a complex process, especially for beginners. Experts advise that investors should choose to invest with a reputed wealth management firm and check the fund manager’s past performance as well the particular mutual fund’s historic performance.

Setting Up Net-Banking And KYC

In order to start investing in mutual funds or stocks, you will need your own bank account that has been verified by KYC (Know Your Customer). You may also need to submit KYC documents to the wealth management firm that you are choosing to invest with.

Directly Investing Online

If you believe you have enough knowledge and experience with investing, you can also choose to directly invest in mutual funds without going through a fund manager or firm. Many reliable companies are offering facilities where investors can buy mutual funds and shares after all the right documentation has been submitted.

As a final note, it is important to do your own intensive research before investing in any mutual funds or stocks for that matter. While investing is a great way to grow wealth, investing incorrectly can also lead to major losses. It is advisable to consult with a qualified financial planner who can guide you in the right direction when it comes to investing.