Everyone wants to grow its wealth. There is only one question revolving around everyone: how to grow wealth with minimum risk and maximum profit?
Its answer is mutual funds. You can earn maximum profit with low risk by investing in mutual funds in India. You should know the mutual fund basics for how to invest in mutual funds especially for beginners in India.
Many
start investing their hard income across various schemes. Some invest in saving
accounts, fixed deposit etc.
Some
may think to invest in the stock market like shares, but due to volatility in
the market many feel insecure to invest.
It
may be because of less knowledge about the share market and high risk
investment.
But
it’s not the solution, you must think about mutual funds investment.
It
is very easy to invest in mutual funds in India, where your funds are regulated
by professionals and this creates much more chance of higher profit instead of
investing on its own.
Before
investing in mutual funds you should know as a beginner each and everything
about how to invest in mutual funds in India, what are its advantages and
disadvantages in India?
What is the meaning of mutual funds?
Mutual
Fund is a basket which contains diversified stock and bonds. There are so many
Mutual Funds companies.
You
have to choose the best Mutual Funds which suit your investment. Your invested
funds are managed by professionals of Asset Management Company (AMCs).
These
professionals invest your money in diversified stock and bonds and they
themselves regulate your funds so there is more chance of profit.
Why invest in mutual funds?
The
best reason to invest in mutual funds in India is that your funds are managed
by professionals.
You
just once need to invest in it, rest Asset Management companies will take
care of your funds, but it does not mean that you need to do nothing, you
have to track your investment results.
If
you feel that the company in your funds is invested not giving the best result
then you can make changes to your investment.
You
have the option to switch anytime between different funds, more over mutual
funds diversified your risk as it is an investment in diversified assets i.e.
stock, bonds, debentures, gold and real estate etc.
So
you can set your plan accordingly that you want to invest in high risk assets
or low risk.
What are the basics types of mutual funds in India?
Before
investing in mutual funds one should know what are the types of mutual funds,
so that we know about the options which are available and we invest
accordingly.
So
there are mainly three types of mutual funds:
Equity Mutual Funds
These
are the mutual funds in which your funds are invested in equity shares only.
Equity
Mutual Funds should be chosen by those who are ready to take high risk.
This will generate better returns in the long term.
If
a market is at the bottom and you are able to take high risk then you can
choose equity mutual Fund.
Greater
risk will generate greater Returns.
Debt Mutual Funds
These
are the mutual funds in which your funds invest in debt funds only like.
Government Securities, Bonds, Corporate deposits.
These
funds are less risky than equity mutual funds. You can earn moderate
return in short term investment.
Hybrid Mutual Funds (Balanced Mutual Funds)
These
are the mutual funds in which your fund is invested on a proportion basis both
in equity and debt mutual funds.
So
in this your risk gets moderate. In Hybrid funds your amount is invested
in some risky assets and some in less risky assets.
Now
the proportion in which to invest is upon your own choice. In this way you can
moderate your Returns.
Certain
other categories of mutual funds in India are, you must know:
Open Ended Mutual Funds & Closed Ended Mutual Funds
In
Open ended funds an option is given to investors that he can at any time
enter in a mutual fund and also anytime can exit from a mutual fund.
So
this investor has the option to sell or redeem their investment anytime.
In
Closed ended funds investors can enter in mutual funds but they cannot
exit before expiry of the fixed period.
In
simple words you cannot sell for a fixed period of time. e.g. Once you invest
you have to wait for a fixed period and after expiry you can sell investment.
Sectorial Funds
In
this type of fund your money is invested in particular sectors like banking,
infrastructure etc.
Equity linked saving schemes [ELSS].
This
is the most popular Mutual Funds as it is known for tax saving.
If
you are investing in ELSS mutual funds in India you will get tax deduction
under section 80c of Income Tax Act 1961 in India.
Whether to
choose a Systematic Investment Plan or Lump Sum Investment?
There
are two options given for how to invest in mutual funds in India.
In
lump sum investment you have to invest the amount on a one-time payment.
This is generally beneficial for those who have large funds to invest.
You
can invest at the time when the market is at bottom and sell when the market
goes up. This will give large returns in a smaller period.
On
the other hand if you have not enough funds to invest at a time then you
can go for a systematic investment plan (SIP).
Under
SIP you have to invest a fixed amount at a fixed interval (weekly,
monthly, quarterly, half yearly and annual basis).
You
can start investing as low as rupees 500 so this scheme is also fit to
your budget and build the habit of saving and investment.
How to invest in mutual funds in India for beginners?
Here
are the steps you need to follow for investing in a mutual fund in India:
Step 1: Identify the investment
The
first step is to identify the investment and identify whether you are
interested in equity mutual Funds, debt Mutual Funds or hybrid Mutual
Funds.
For
this you have to assess your risk appetite, that is what amount of risk you are
ready to take.
If
you are ready to take higher risk then go for equity mutual funds and if you
want to take less risks than debt mutual funds suits you most.
In
order to balance your risk, go for hybrid Mutual Funds.
Step 2: Identify the Fund house
Once
you assess your risk appetite then the next step is that you have to open a
bank account, which is only used for investment purposes and not as a normal
savings account.
You
have to choose fund house from you are comfortable by taking assistance from
professionals. Fund houses are managed by Asset Management companies.
Step 3: Choose the scheme
Next
you have to choose the scheme by taking the help of professionals. You must
analyse the performance of various schemes.
Check
their past history results and then invest your fund in diversified assets
according to your chosen risk appetite.
You
can invest in lump sum if you have enough money at a time; else you can choose
a systematic investment plan.
Step 4: Proper follow up
Next
step is proper follow up. It is the most important step.
Your
funds are managed by Asset Management companies, so there is more chance of
gain, but it does not mean you have to do nothing after just giving money for
investment to Asset Management companies.
You
have to check the performance of your investment. If you find that your money
invested not giving the best results then you can make a change in your
portfolio.
Which mutual fund is best for beginners in India?
Here
are some of points with the help of which you can identify whether a particular
mutual fund is beneficial for you or not:
Keep check of past records
Before
investing it is necessary to check the past performance of the company in which
you want to invest, if the company gives a continuous increase in return then
this is beneficial for you.
Risk
Your
ability to take risk also decides which mutual fund is best. If you are ready
to take higher risk then go for equity mutual fund and if you are in want to
take less risk then choose debt Mutual Fund. In order to take moderate risk,
choose a hybrid mutual fund.
Returns
Your
return depends on your ability of taking risk, if you choose equity mutual
funds and you may have higher Returns, if you are taking less risk by investing
in debt mutual funds your return accordingly is less.
Expense ratio
Expenses
are also very important to decide which mutual fund to choose. Certain trading
expenses of mutual funds in India like brokerage Commission, selling expenses
are high, and so if expenses are high you return will go less.
Asset diversification
Under
a mutual fund you have to choose diversified assets for investment. Do not go
for only a single asset, if you choose diversified assets your risk also gets
diversified.
If
one asset does not give you satisfactory results then there is no need to take
tension because you have invested in another asset also which can give you
better Returns.
What are the advantages and disadvantages of mutual funds in India?
Advantages of Mutual Funds
Flexible
Mutual
funds are flexible. You can at any time enter into a Mutual Fund investment and
at any time can exit from a mutual fund. You can at any time sell the shares.
It is more convenient for investors.
Tax benefits
Equity
linked savings scheme (ELSS) is the most popular mutual funds as it is
known for tax saving.
If
you are investing in ELSS Mutual funds you will get tax deduction under section 80c of Income Tax Act 1961 in India.
Diversified risk
Under
mutual funds your risk gets diversified if you choose investment in diversified
assets. AMCs invest your money into various Assets.
They
invest in risky as well as less risky assets. So, in this way your risk gets
diversified.
Systematic investment plan
Mutual
funds have given options to their investors to route their investment through a
SIP. In this one can start investing from rupees 500
only. This will build your habit of saving and investment.
Disadvantages of mutual fund
Expenses
This
is the main disadvantage of mutual funds. In certain trading mutual fund
expenses like brokerage Commission, selling expenses are high. If expenses are
high your return will go low.
Volatility
Volatility
means ups and down in the market. Sometimes this situation gives you an
expected loss and sometimes this may give you an unexpected gain also.
Lock in period
Certain
mutual funds have lock-in periods. In which you cannot sell your investment.
It
is a major drawback, so even if the market goes at peak and you want to sell
investment but you could not sell because your investment is locked in for a
specified period.
Conclusion
Mutual
Funds in India are best for investment for beginners. They just need to do the
proper planning of investment with the help of professionals.
Professional
will guide you the mutual fund basics & right way to invest and
after investment a proper follow up of your investment will definitely give you
the best returns.
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