Mutual Fund Basics Investment Guide for Beginners in India

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.



    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.



    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



    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



    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 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.



    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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