While investors are often advised to invest in mutual funds, there’s little information available on the why’s and how’s of investing. In this article, we list benefits mutual funds offer and also deal with the ABC’s of ‘how to invest’.
Professional expertise
Investing in markets needs professional expertise that not many retail investors possess. Conversely, mutual funds are run by professional portfolio managers. Not only is investing their specialization, they have access to analysts and research, which makes them better equipped to make investment decisions.
Diversification
A mutual fund portfolio holds multiple instruments thereby offering diversification. For instance in an equity fund, prices of certain shares falling can be offset by rising prices of others, thereby keeping the overall portfolio afloat. Then there are hybrid funds offering diversification across asset classes by simultaneously investing in equity and debt.
No need to time the markets
Investing in mutual funds via the systematic investment plan (SIP) route does away with the need to time the markets. A fixed amount is invested every month through market ups and downs, thereby helping reduce the investment cost over the long-term.
Easy on the pocket
You can start an SIP for as little as Rs 500 per month. Also, expenses charged by the fund company are capped by the market regulator SEBI. In effect, mutual funds are affordable investment tools.
Having discussed the benefits, now let’s take a look at a how you can invest in mutual funds in 5 easy steps:
Step 1: Engage an advisor
A qualified and competent advisor can go a long way in helping you with the investment process. Don’t hesitate to engage one even if it entails paying a fee.
Step 2: Set goals
Decide why you are investing i.e. wealth creation, to provide for children’s education. For each goal you should have a distinct mutual fund portfolio in place. The advisor has a part to play here too.
Step 3: Select funds
Along with your advisor, study funds on both qualitative and quantitative parameters to select ones that are apt for you.
Step 4: Become KYC-compliant
To invest in mutual funds, you must comply with Know Your Client (KYC) norms. Among others, submitting copies of the PAN card and a proof of address are mandatory. If your advisor is an AMFI-empanelled mutual fund distributor, he can help you with the paperwork.
Step 5: Start an SIP
Submit an ECS mandate form to the fund company, to enable regular debits from your bank account. Also, you need to fill and submit an application form for each fund you want to invest in.
This article first appeared in the September 24, 2013 edition of The Times of India. The original article in its entirety has been produced above.
