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How to Invest in Mutual Funds

29 April 2024 7 min read

“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.”
– Scott Cook

Investing is an alluring and far better alternative to saving. Nevertheless, it’s not easy. There are enough options to make investing confusing and enough roads to make it hard to navigate. However, among the many options available, mutual funds have emerged as one of the easiest ways. In this article, I will try to extensively explain how to invest in mutual funds and leverage this financial instrument to build wealth.

You can invest in mutual funds offline through agents for personalised advice at higher costs, or online using platforms like Groww for convenience. Direct investments reduce fees, and demat accounts offer a consolidated view of investments, though they may involve extra costs.

“Mutual funds offer a way to potentially compound your money, making them accessible to investors of all levels of experience, from novices to experts”

Before we delve into the question of ‘how to invest in mutual funds,’ let’s briefly understand the history and the instrument itself.

Origin: Mutual funds started in 1774 with Dutch merchant Adriaan van Ketwich.
U.S. Regulation: Structured and regulated in the 1930s after the 1929 stock market crash.
India’s Start: Began with the Unit Trust of India in 1963 under government initiative.
Liberalization Impact: Opened to private and foreign investments in the early 1990s, leading to growth and innovation.
Current Status: Managed by SEBI, offering diverse investment options across various asset classes, crucial to India’s financial market.

So, how to invest in mutual funds? The process is easy. As you might be already familiar, a mutual fund is an investment vehicle that pools money from many investors and invests it in a diversified portfolio of stocks, bonds, or other securities.

Understand how a mutual fund works with an example :

50 individuals in India, each interested in investing in the stock market but lacking either the expertise to select individual stocks or the capital to invest extensively. Each person decides to contribute ₹20,000, pooling together ₹1,000,000.

They appoint a professional fund manager from a well-known asset management company in India. The manager invests this ₹1,000,000 in a diversified portfolio that includes shares.

As these companies perform well, the value of the mutual fund’s investments grows. The profits (or losses, if the market declines) are shared among the investors proportionate to their initial investment. This way, each investor benefits from a professionally managed, diversified portfolio, which mitigates individual investment risks and doesn’t require a large amount of capital to start.

The best thing about it is that it offers you exposure to a broad range of investments without having to research and select each holding.

How to Invest in Mutual Funds in India?

Well there are many ways to invest in mutual funds, here are some:

Investing Directly Through Asset Management Companies (AMCs) in India

Investing in mutual funds directly through Asset Management Companies (AMCs) offers a specific approach with both advantages and considerations. Let’s delve deeper into this option:

Advantages of Investing Directly with AMCs:

Convenience: Invest directly from the source, eliminating the need for intermediaries.
Potentially Lower Fees: AMCs may offer “direct plans” with lower expense ratios compared to regular plans offered through other platforms. This can lead to higher returns in the long term.
Transparency: Access detailed information about the fund, including its investment strategy, portfolio holdings, and performance history directly on the AMC website.
Multiple Investment Options: Many AMCs allow both lump sum investments and setting up Systematic Investment Plans (SIPs) for regular contributions.
Control & Flexibility: You have complete control over your investments and can easily switch between different funds offered by the same AMC.

Considerations of Investing Directly with AMCs:

Research Responsibility: You’ll need to conduct your own research to choose suitable funds. AMCs might not offer personalized investment advice.
Limited Choice: You’ll be restricted to the mutual funds offered by that specific AMC.
Transaction Fees: While expense ratios might be lower, some AMCs may charge transaction fees for buying or redeeming units.
Investment Knowledge: Understanding investment terminology, fund types, and risk factors is crucial for making informed decisions.

Is Investing Directly in Mutual Funds with AMCs Right for You?

This approach might be suitable for investors who:

Are comfortable with independent research and making their own investment decisions.
Have a clear understanding of their risk tolerance and investment goals.
Prioritize potentially lower fees and direct access to the fund management company.

Tips for Investing Directly with AMCs:

Research Different AMCs: Compare the range of funds offered, expense ratios, and their online platforms.
Read Fund Brochures & Performance Reports: Understand the investment objective, risk profile, and historical performance of the fund.
Start with a Few Funds: Diversify your portfolio but avoid over-diversifying, making it harder to track performance.
Review Regularly: Monitor your investments and consider rebalancing your portfolio as needed.

Online Investment Platforms: Convenience and Choice

Online investment platforms have become a popular choice for investing in mutual funds in India. These platforms offer several advantages:

Wide Range of Mutual Funds: Access a vast selection of mutual funds from various AMCs in one place. Compare them side-by-side based on their performance, expense ratios, and investment strategies.
User-Friendly Interface: Many platforms offer intuitive interfaces that simplify investing, even for beginners. Features like investment calculators, portfolio trackers, and goal-based investment tools can streamline your investment journey.
Convenience & Flexibility: Invest any time, anywhere with a few clicks. Schedule automatic investments or redeem funds easily through the platform.
Research & Educational Resources: Some platforms offer educational resources, investment guides, and market analysis tools to help you make informed decisions.
Fractional Shares: Some platforms allow you to invest in fractional shares, making it easier to start investing with smaller amounts.

Things to Consider with Online Investment Platforms:

Platform Fees: While convenient, online platforms may charge transaction fees, account maintenance fees, or advisory fees that can eat into your returns. Compare fee structures before choosing a platform.
Investment Advice: Not all platforms offer personalized investment advice. Some rely on robo-advisors or offer basic recommendations. If you need more guidance, consider consulting a Registered Investment Advisor (RIA).
Security: Ensure the platform has robust security measures in place to protect your financial information. Look for two-factor authentication and encryption protocols.
Research Responsibility: While platforms offer resources, it’s still important to conduct your own research on specific funds before investing.

Choosing the Right Online Investment Platform:

Consider these factors when selecting an online investment platform:

Fees: Compare fee structures and find a platform that aligns with your investment budget.
Investment Options: Ensure the platform offers a wide range of funds that suit your investment goals and risk tolerance.
User Interface: Choose a platform with a user-friendly interface that is easy to navigate and understand.
Customer Support: Opt for a platform with reliable customer support should you have any questions or issues.

When considering how to invest in mutual funds, it’s essential to understand the different types available. Some mutual funds focus on specific sectors or industries, while others take a more diversified approach. There are also funds that concentrate on particular investment strategies, such as growth, value, or income.

Investing in Mutual Funds Via Registered Investment Advisors

Registered Investment Advisors (RIAs) offer a distinct approach to investing in mutual funds. Here’s a breakdown of their role and how they can benefit you:

Advantages of Working with RIAs:

Personalized Investment Advice: RIAs take the time to understand your financial situation, risk tolerance, and investment goals. They then create a customized investment plan tailored to your specific needs.
Fiduciary Duty: RIAs act in your best interest by law. They are legally obligated to prioritize your financial well-being and recommend investments suitable for you, not for commission purposes.
Ongoing Support & Monitoring: RIAs provide ongoing guidance, monitor your portfolio performance, and make adjustments as needed based on market conditions and your evolving financial goals.
Education & Expertise: RIAs are qualified professionals with the knowledge and experience to navigate the complexities of the financial markets. They can help you make informed investment decisions and stay on track with your financial plan.

Considerations of Working with RIAs:

Fees: RIA services come with fees, which can be a percentage of your assets under management (AUM) or a flat fee. These fees can add up, so it’s important to weigh the cost against the value they provide.
Finding the Right RIA: Not all RIAs are created equal. Look for an RIA with experience in your investment style and goals. It’s also important to feel comfortable with their communication style and personality.
Minimum Investment Requirements: Some RIAs have minimum investment requirements, which might not be suitable for everyone, especially those starting with smaller amounts.

Is Working with an RIA Right for You?

An RIA can be a valuable resource for investors who:

Value personalized investment advice and guidance.
Need help navigating the complexities of the financial markets.
Have a significant amount of money to invest

Please note,

The views in the article /blog are personal and that of the author. The idea is to create awareness and not intended to provide any product recommendations.