How to Invest in Mutual Funds: Complete guide for beginners

We all understand that investing in mutual funds can be a daunting task. Having our money grow while we sleep is something that appeals to each one of us. But, how do we go about it? What is the fastest and safest way to increase the value of our investment? Unfortunately, creating a personalised portfolio is no easy task. Like any other skill, investing takes years of study and practice to master. So how do we make the right investment decisions while also focusing on our careers and spending time with our loved ones? Mutual Funds.

How to Invest in Mutual Funds?

There are more than 2,500 Mutual Fund schemes available. Surely some are better than the others and you only want to invest in the best. Who do we listen to? Friends and family? They may have your best interests at heart but are do they have the necessary expertise to help you make the right decision? What about brokers and distributors? Are their interests aligned with your interests? They earn their money through commissions from select mutual fund schemes. How do you make the right choice?

1. Identifying Goals and Risk Tolerance

A major step that helps trim down the long list of mutual funds. Before investing, you must identify your goals for the investment. Are they short term goals like buying a car or taking a vacation that will take place in the immediate future? Or are they long term goals like a retirement fund which is decades away?

You should also consider your appetite for risk. Are sudden swings in the value of your mutual fund in exchange for the possibility of higher returns acceptable to you? Or would rather prefer a more conservative style? Another important point to consider is if liquidity is a primary need because liquid funds generally offer lower returns than other kinds of funds.

Piggy Pro Tip 1: As a thumb rule, we consider all goals within 5 years to be short-term goals. Any goal beyond 5 years is considered to be a long-term goal. This allows us to plan for our goals in a structured manner.

2. Fund Selection and Strategy

The two common types of funds are Growth (Capital Appreciation) Funds and Income (Capital Preservation) Funds. For an investor with a long-term goal and moderate to high-risk tolerance, growth funds are recommended. These funds generally hold a high percentage of their assets in equity products (common stocks) with variations among Large-Cap, Mid-Cap and Small-Cap companies. The matrix given below allows you to understand risk vs reward benefits among the 3 types of common equity funds.

Piggy Pro Tip 2: If saving on your tax liability is on your mind. An Equity Linked Savings Scheme (ELSS) Fund might be the right pick for you. It functions like any other Growth Fund, but any investment made in these funds is exempt from being taxed (up to Rs. 1,50,000 under Section 80(C) of the Income Tax Act). Your investment will also have to serve a three-year lock-in period which serves to be a suitable timeframe for your investment to grow.

If capital preservation and consistent income is a priority, like for a retired individual, Income Funds (more commonly known as Debt Funds) are advisable. Those with short-term goals may also invest in these funds with the option to reinvest the income generated. These funds usually buy bonds and other debt instruments that pay interest regularly. This allows the investor to protect the capital invested while also earning a slightly lower but a fixed rate of return on it.

Piggy Pro Tip 3: For the purpose of diversification, a conservative investor should maintain a 50-50 or so asset allocation between Growth & Income Funds while a more aggressive investor can go up to 75-25 between Growth & Income Funds.

We have curated a list of best performing mutual funds and based on your fund selection and strategy, you should be able to pick the right fund for you! 

Still confused about which specific scheme to pick? Read on to find out more.

3. Evaluating Fund Managers and Past Results

As with all investments, it’s important to research a mutual fund’s past results. To this end, the following is a list of questions that you should ask yourself when reviewing a fund’s past performance:

• Was the fund manager able to deliver results that were consistent with general market returns?
• Was the fund more volatile than the major indexes and its benchmark?

The answers to these questions prove to be a useful tool when comparing two mutual funds of the same type and strategy. General market trends also play a significant role in the performance of different types of mutual funds.

4. Investment Procedures & Strategies

The two most common investment procedures are either through a Lumpsum Investment or a Systematic Investment Plan (SIP). As the name suggests, lumpsum investments are an investment of a large sum of money at once. It is usually done is those mutual funds whose assets are likely to appreciate in the long term, making the investment profitable except in cases of high volatility.

Systematic Investment Plan (SIP) is an investment procedure where a fixed amount of money is invested every month. New and seasoned investors alike find great benefits in this method. The most effective advantage of SIPs is ‘rupee cost averaging’. Through a SIP investment, the factor of volatility is reduced and as a result, the overall gains will also increase. Rupee cost averaging works out best in volatile markets but is useful even when the markets are in a bull run. It essentially helps you buy lesser units when the markets are expensive and buy more units when the markets are inexpensive.

5. Riding the Waves of Volatility

A commonly seen theme among inexperienced investors is that during downward trends, investors exit their positions in fear of losing their investment capital. Markets are cyclic and downward trends are only a part of the game. At that moment, it may make you nervous and even question your investment choices but all investing professionals can agree that investing in the long term is the easiest form of investment. Markets always correct themselves and given enough time, you will see your investments come to fruition and your financial dreams become a reality!

Benefits of Investing in Mutual Funds

1. Professional Portfolio Management

One of the biggest challenges for any investor is picking the right investment opportunity. Mutual Funds are managed by a team of research analysts who are headed by a professional portfolio manager who looks at these investment opportunities and makes a call as to what needs to be done. With their expertise, experience and the fact that most companies give Mutual Funds additional information on their investment opportunities, it is more likely that the fund managers will make the right investment decision.

2. Reduced Risk

Mutual Funds have a much larger pool of money compared to any individual investor. They thus have the resources available to invest in a larger selection of investment opportunities. This helps in diversifying the portfolio and is the primary reason which makes investing in mutual funds such a safe investment.

3. Easy to Understand

Mutual Funds are the simplest investment vehicles available in the market. Each mutual fund has a well-defined mandate which is easily available to all. Investment decisions are made based on the pre-defined fund objective and investors may handpick the fund/s of their choice which aligns with their investment objective. Be it long term wealth creation or short-term capital appreciation, there is a mutual fund for all of us. 

4. Fair Pricing

Mutual Funds have the simplest cost structures of any investment vehicle in the market. The only fee paid to the mutual fund house is an Expense Ratio. Expense ratios are simple management fees and operational costs that are paid to the mutual fund house. The expense ratio is calculated by dividing a mutual fund’s operating expenses by the average total rupee value for all the assets within the fund.

Why Mutual Funds?

The sole purpose of a mutual fund is to bridge the gap between an interested investor and professional investing practices. Simply put, a mutual fund is a type of financial vehicle made up of a pool of money collected from many investors. This money is invested in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets (pool of money) and attempt to produce capital gains or income for the fund’s investors. 

There are several reasons that support investments in mutual funds. They are easy, accessible and much more. Here are a few of them;

1. Ease of use

Mutual fund investing has become very convenient over the course of time. There is no need for paper-work or timing the market. Everything is online and super-fast. There are a lot of facilities with mutual fund investing like portfolio management, plan switch, etc. it takes just a few minutes to get going with your first investment and many more to come.

Start your investment journey with piggy and make a difference of Rs 20 Lakhs in your portfolio.

2. Start small

This is a great advantage when it comes to investing with mutual funds. You can start small, as low as Rs. 100 and increase the amount gradually as per convenience. SIP or systematic investment plan is a way of investing which allows investors to invest on a regular basis with a small amount of investment. Contradictory to lump-sum investment, SIP allows investors to make a small contribution towards investment portfolio and create wealth

3. Tax- saving

ELSS is Equity Linked Savings Schemes is an option offered by mutual funds which allow investors to save taxes on investment up to Rs. 1,50,000 under section 80c of Income Tax Act. The lock-in period is of 3 years which is the lowest when compared to other tax-saving instruments such as PPF, FD etc.

Have a look at why ELSS is a better tax-saving instrument when compared to other

4. Professional touch

The mutual funds are managed by experts called fund managers. These fund managers are supported by a team of financial researchers who maintain up-to-date information about market trends. The fund managers based on this data and his own experience manage your funds and makes the decision regarding selling or purchasing funds. The knowledge and skill set of fund managers goes beyond retail investors.

How do Mutual Funds work?

Mutual funds are investment instruments which club the investments from various investors and invests them in the stock market under a given scheme. These funds are managed by a special body called Asset Management Company (AMC).
The total pooled money is invested in different types of securities like debt funds, equity funds, bonds, etc. the funds are managed by an expert called Fund Manager as appointed by the AMC. A fund manager is responsible for managing the funds in accordance with the market corrections and creates wealth for the investors. An annual fee termed as Expense Ratio is charged from the investors against the services, they avail which is mainly managing their portfolio. The returns are generally in the form of capital appreciation or dividends. There is an option with the investors to either earn the gains as regular income or they can reinvest the returns back to the investment amount.

How to Invest in Mutual Funds with Piggy?

Investing in mutual funds can never get easier. With Piggy, it is fast, simple and paperless. Just follow these three simple steps and you are done!
Step 1: Login to your piggy account or sign up
Step 2: Fill in your PAN and personal details to get your KYC done
Step 3: Start investing in your choice funds from a wide variety or invest in best mutual funds as recommended by experts.