How To Invest In Mutual Funds For Beginners In India: We have all read the famous investment quote “Don’t put all your eggs in one basket”. When related to investing, it refers to not investing or betting on the success of one company.
While the quote has stood the test of time, it still makes you wonder – “How do I put my eggs and that too into which baskets? “
An everyday retail investor in India has the following options:
A. Invest in conservative assets like real estate, gold, bank deposits, etc. OR
B. Invest in shares of one or two companies in the stock market.
You also have a third option, which is making the rounds in the
financial world – Mutual Funds.
Hello Finvestors and welcome to Fingrad. Today, we’re going to take a peek into the world of mutual funds and how to How To Invest In Mutual Funds For Beginners In India
Off late, the term mutual funds have been doing the rounds across the finance sector. This has had both retail and institutional investors curious. So what are mutual funds and why are they trending?
What Are Mutual Funds?
A mutual fund is a pool of funds that are invested by diversifying across debts, stocks, and other market securities. Each unit of a mutual fund gives the investor part ownership in all those instruments without having to invest whole amounts into any single security. These funds are managed by fund managers or portfolio managers who allocate funds across assets.
The purpose of these funds is to provide professional portfolios to retail investors at an affordable price. Usually, the funds are managed by asset management companies or investment firms.
The fund managers usually hold assets in the funds they manage. Each fund on average holds close to a hundred different securities, thereby diversifying risk and returns. The risk factor is diluted while also the returns are stabilized.
Types of Mutual Funds
1. Equity Funds
A Fund where the entirety of its structure is completely invested into equity shares of different companies. Unlike individual stocks, an equity fund invests across multiple companies. So through an equity fund, you would end up owning a part share across a basket of companies.
Equity Funds further include many types based on the size of the company invested in or the type of companies that investors can select according to their preference and risk.
2. Fixed Income Funds/Debt Funds
A fund that invests in fixed income securities like corporate bonds, government bonds, and other securities. This sort of investment scheme is suitable for conservative investors who are looking for stable returns, high liquidity, and security holdings. These funds pay out a fixed dividend until their agreed-upon maturity date.
3. Hybrid Funds
A Hybrid fund is a combination of equity and debt securities. By definition, a hybrid fund invests in two or more asset classes. A balanced fund usually has a 60:40 ratio of Stocks & Debts respectively.
4. Index Funds
An Index fund is a portfolio designed to replicate the Index of a stock market like SENSEX or NIFTY. It is a form of passive investing because it’s primarily designed to mimic a major index. This leads to lower expense ratios than most mutual funds present in the market.
Pros and Cons of Mutual Fund Investing
Before investing in a mutual fund, it is better to understand the risk/reward factors associated with this investment plan. Better returns also mean a higher rate of risk.
Some of the Advantages of Mutual Fund Investing are
Liquidity is the ability to turn your assets into cash. Easier liquidity is always better as your funds are converted into cash quickly. Conservative assets such as deposits are not associated with the same privilege.
2. Simple form of Investing
Unlike other assets, mutual funds do not require complex research or higher financial knowledge.
A diversified portfolio allows you to amass wealth, increase your portfolio value and gain returns even if a few assets underperform in the market.
3. Better returns than conservative investments
A Fixed deposit provides a maximum return of 5.5% to its deposit holders, which is not enough to beat the current inflation rate of 7%. Mutual funds provide much better returns and liquidity than a fixed-term deposit, especially over a longer time period.
Now, Here Are Some of the Downsides of Mutual Funds
Also Check Out: How to Pick a Mutual Fund? A Beginner’s Guide.
1. Lock-In Period
A mutual fund is designed to keep investors periodically investing in a fund across a longer period of time, usually years. So before investing, it is advisable to do your due diligence. Mutual funds are long-term investments and require you as an investor to be dedicated fully. To enjoy the benefits of consistent returns year on year, investors are required to consistently invest as well.
2. Management Expenses
Since mutual funds are managed by Portfolio/fund managers, they are associated with professional fees. This involves the management fees, trading fees, commissions, etc. This is involved in the yearly expense ratio involved with the fund.
From the above notes on how to invest in mutual funds for beginners in India, it is clear that mutual funds are safer investment schemes than most. The diversification protects investors from a majority of market-related risk and it provides returns adequate enough to tackle inflation.
Furthermore, they are flexible and liquid so they can be converted to cash easily. In the long term, they can help you as a beginner investor to accumulate wealth and assets. Unlike other assets, mutual funds require patience and consistency for growth.
Do let us know your opinions on How To Invest In Mutual Funds For Beginners In India in the comment section below.
For more content related to mutual fund investing, Refer to our free course. As always, Happy Investing!
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