How to make the Best Mutual Fund Investment in India

Mutual funds are gaining huge popularity in recent times and they are the preferred investment choice of most investors in India today. The advancement in technology and the online investment options which allow the investors to invest from the comfort of their homes has made it the favorite of the investors. Mutual funds provide better returns than the traditional methods and the risk is less compared to stock market investments.

What are Mutual Funds?

A Mutual Fund is a type of investment product in which the funds of various investors are pooled together to form the corpus of the fund. This corpus is invested in stocks, bonds, government securities and other assets. There are different types of mutual funds available in the market today and many investors get confused and overwhelmed by the multiple options to choose from. So here we discuss in detail how mutual funds work and how to make the best mutual fund investment in India:

How do Mutual Funds Work?

The asset management company (AMC) pools the investments from various individuals and institutional investors and invests in different securities to generate maximum returns for the investors, in line with the investment objectives of the fund. These funds are managed by professional fund managers with vast expertise and experience in the management of the funds. The investors earn through regular dividends, interest and capital appreciation. They can choose to reinvest the capital gains for capital growth or earn a steady income by means of the dividend option.

Tips to Invest in the Best Mutual Funds

Before investing in any mutual fund, first identify your goals for the investment. Whether you want long-term capital gains, or a steady income. Is it needed for children’s higher education, or for your retirement? Identifying your goals will help you decide on which type of fund to invest in to get maximum benefit.

Risk tolerance should be assessed. As every stock market investor knows, risk and return are directly proportional. In other words, high risk yields high returns. Are you prepared to take risks or prefer a more conservative approach? What is the period of the investment? Do you foresee any liquidity concern in the near future? These are the questions that you have to ask yourself before deciding on the type of mutual fund to invest in.

Invest in different mutual fund schemes and across different asset classes to diversify and minimize risks. When one fund underperforms, other better performing funds will balance the loss. There are many mutual fund companies, each offering many schemes. Before investing in any mutual fund scheme, check their past performance, management efficiency, expense ratio, and compare with different schemes online to identify the ones that have the potential to offer a consistent return. Direct plans are always preferable to regular ones as they have a lower expense ratio.

SIPs are preferable to lump sum for first time equity investors as lump sum investments have a risk of catching the stock market peak. In SIP the investment gets spread over time and invested across market levels. The benefit of rupee cost averaging in SIPs helps you average out the cost of your investment and earn higher returns in the long term. When you want to invest in a fund with a lower risk profile, then SIP is the best option. The best benefit of SIP is that you can invest small sums as little as Rs.500/-, so they do not cause a financial burden on the investor. They are also more flexible. You can increase, decrease or stop the SIP anytime. Due to the power of compounding, small sums invested over a longer period can fetch high returns and create a huge wealth corpus.

It is important that you review your portfolio from time to time and check how the investment is doing. If it is not up to your expectations, you may need to switch investments from the underperforming funds to better ones. On the other hand, if your portfolio has significantly outperformed your expectations, it is best you rebalance your portfolio and switch investments from high-risk schemes to low-risk mutual fund schemes and secure the returns already earned.

Starting investing in mutual funds from an early age has huge benefits. Staying invested for longer periods can maximize the return on investment. A good corpus created can be very helpful to fulfill future financial needs like children’s education, buying a house or car, retirement corpus etc. You can start small and as your income increases, you can top-up your SIPs resulting in a larger corpus.

Finally, you have to check for the short-term and long-germ tax implications in different types of mutual fund schemes before investing. By investing in the Equity Linked Savings Scheme (ELSS), you can claim income tax exemption under section 80C of the income tax act.

0