How to invest in Mutual Funds is unfortunately not a burning
question for most investors.
This is because they are more concerned with ‘the best
mutual funds’.
How you invest in mutual funds and Why you invest in mutual funds are the two questions if answered well makes your investing
journey a smooth one.
If not then you spend a major time recuperating losses than
actually making gains.
KYC
KYC stands for Know Your Customer and is only a one time
exercise similar to what banks have when you have to open a banking account.
Unlike a banking account kyc though, you need not do a KYC
each time you invest in a new mutual fund house.
You only need to do your KYC once before you start investing
in mutual funds.
This can be done via offline form or online.
KYC requires basic information like your contact number,
email id, communication address, etc. among other things supported by a self-
attested pan card copy coupled with another self-attested document capturing
your address (aadhar card, electricity bill, driver’s licence, etc.)
Additional reading: Click Here to read about mutual fund mistakes you should avoid making
Offline/Online
You can invest either via offline forms or online.
Offline forms have to obviously be supported by cheque
copies.
It is a very common misconception that for Sip’s registered
via offline forms, cheques have to be submitted every month which is of course
not true.
Irrespective of the duration of your Sip, a cheque copy has
to be provided only at the time of registration.
Offline or online, Nav is allotted only when the money has
been deposited/transferred to the mutual funds account.
Have an Emergency Fund
Ideally you should set aside an emergency fund equivalent to
six months expenses before investing in mutual funds.
This could be in a combination of liquid funds and fixed
deposits.
The emergency fund could be more than six months of expenses
depending on other prevailing conditions but never less.
Having an emergency fund has several benefits, first the
very obvious one that you have the finances to fall back upon in case of an
emergency.
Secondly you do not feel compelled to touch your investments
when in an emergency, if you do then both your valuations as well your goals
are affected negatively.
Thirdly when you touch your investments in case of your
emergency, you would also need to pay taxes as and when the conditions for the
same are met with.
It is better to invest a lower amount to begin with and set
aside an emergency fund then to invest the complete amount without any
emergency fund and then touch your investments in case of an emergency.
Professional Advice
In a highly populated country like ours, opinions will
always be aplenty and mutual funds are no exception to that.
It is one thing to receive unsolicited advice from family
and relatives but with mutual funds recent trend suggests that investors also
seek advice from strangers on social media who are no more qualified than them
for mutual fund ‘advice’.
This never bodes well since the advice you receive, whether
solicited or unsolicited has no accountability or qualification and you end up
moving in and out of schemes based on differing advices you receive which in
turn means higher taxes and exit load charges.
Mutual fund advice is not a one time thing, it is:
- Prior to investing
- While invested and
- How to redeem
So do the simple and sound thing of reaching out to a
distributor/advisor for better handling of your mutual fund investment.
Be it wealth or health, only let the qualified professionals
enlighten you.
Additional reading: Click Here to read about how to build a mutual fund portfolio.
Understanding risk profile
Mutual fund investments are subject to market risks
This is often accompanied with most mutual fund related material
and yet very rarely do investors dig deeper into this.
Every mutual fund scheme will have its own risks and the
ability to withstand it will differ for each investor.
Then comes into the picture other factors such as time
horizon, goals, mode of investment, etc.
Even an individual having all the same attributes as someone
else can still have a different risk appetite, the personal in personal finance
is of more weight than finance.
Goal Aligned Portfolio
Ideally your mutual fund investment should be aligned to
life goals, either certain schemes to each goal or your complete portfolio to
one goal.
Whether you have any goal or not, we all are going to retire
at some point so retirement by default becomes a goal and that becomes all
the more important considering the rising health expenses and gradual increase
in life expectancy.
Having a goal helps you stay disciplined but more
importantly it helps you see the bigger picture with regards to your mutual
fund investment.
Goals help you stay calm when the markets are volatile
because you know your goals are still far away and there is no need to panic by
short term volatility.
High Returns is not a goal, it is a desire and personal
finance is about goals and having a plan to achieve them and not about fulfilling
desires.
Mode of Investing
There are three modes of investing in mutual funds:
- SIP
- Lumpsum &
- STP
SIP
A sip plan in a mutual fund is a mode of investing via which
you can make periodic investments into mutual funds if you do not or cannot
make lumpsum investments.
The period could be:
- Daily
- Weekly
- Monthly
Lumpsum
A lumpsum investment is a one time investment unlike a SIP
investment which is periodic.
It can be done as many times as wanted though.
Whether you do a Lumpsum investment or not, it is always
better to have an ongoing sip investment.
STP
A Stp in mutual fund is a mode of investing in which you
make a lumpsum investment in a debt or liquid fund.
You transfer a portion of this lumpsum investment
(debt/liquid) into your primary equity fund either daily, weekly or monthly.
The primary purpose of this exercise is so you do not invest
your entire investment into primary equity fund in one go.
This is all the more important if you feel the market is
overvalued or is currently going through a very bearish phase.
It also helps during a volatile market so you get to average
your investments.
The kind of debt/liquid mutual fund you make the primary
lumpsum investment in would depend upon the duration of your STP plan since each
debt fund varies with respect to their exit loads.
Growth or Dividend
When you invest in mutual funds you get the following two
options:
- Growth
- Dividend
The growth option means any appreciation the fund makes
would be added to your valuation amount and will stay the same way until and
unless you decided to withdraw.
The dividend option within itself too gives you further two
options:
- Dividend pay-out
- Dividend reinvestment
In the dividend pay-out option, any dividend declared by
your mutual fund scheme would be paid to you.
Whereas in the dividend reinvestment, any dividend declared
by your mutual fund scheme would be reinvested in the same scheme.
Avoid Transactional Platforms
A transactional platform could include anything from a bank,
brokerage firm to any online portal that allows you to execute transactions.
The issue with such platforms is that there is no
personalized or human touch.
A mutual fund portfolio needs to be personalized catering to
each individual specifically, there is no such thing as ‘best mutual fund
schemes.’
Such platforms only allow you to invest but do not ask you
the pertinent questions without which the entire exercise is futile.
You need (not want) an advisor/distributor who can ask you
the why and answer the how.
Bank A will mostly if not only promote funds of parent company
A, there is too much turnover with banks too so the one who assisted in the
beginning may not be the same one during the journey.
Investing in mutual funds is not a one-time event, it is a
lifelong journey.
There are several examples of those who had a poor first
time experience in mutual funds to never invest again.
How you begin your investing journey in mutual funds is very
important, first impressions may not be the last impression but it is a lasting
impression.
Often the experience you undergo at the start is make or
break.
With mutual funds the ‘How you invest ’ is as important as
the ‘Why you invest’ question.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
