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April 25, 2022

How to Invest in Best Mutual Funds? Strategy For Beginners

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“Mutual Funds Sahi Hai”, we have been seeing this ad on Television or on YouTube almost every day but still people are scared of investing in it because nobody tells you “Sahi Kaise hai”?

Also, what mistakes people commit is, they call or ask some random people for random tip/advice and if that person says ABC is good and have given good returns. Based on the past track people assume, it will be good let’s invest in it.

If you listen to any XYZ and invest in that particular Mutual Fund, without doing your own research or making decisions based on some random tip. You wouldn’t know whether you have made a right or not. But let me be a little shrewd here, you have made a blunder. Yes, you read it right you have made a blunder. Let’s discuss.

Today here in this Blog I will tell you, how you can start investing in Mutual Funds and what mistakes you should avoid before investing. Let’s begin with the basics

What is Mutual Fund and how it works?

Let’s take a very simple example, assume that I was to go from Delhi to Ladakh I have two options. Option One I can take out my own car, I drive on my own, I choose my own way and enjoy. Because as far as I know driving, I am sure I will be safe till the time my staring is in my control but mistakes can happen by anyone, anywhere but you learn from your mistakes.

Now, option two I am not really keen on driving I just want to reach Ladakh, that’s it so what I can do is I can just hire a professional driver, in short, he takes the decision on which road to choose and what speed to drive where to stop. I keep all the decisions at his discretion I just told him the final destination.

Difference Between Stocks & Mutual Fund

That’s exactly the difference between a stock market investment and a mutual fund investment. In stock market investment you take your own decisions you know where you have to go how to go. You have expertise in that and you have the enthusiasm I may say to explore these things but if you choose the second option, you’re really not bothered to explore things you better hire a professional and he will make decisions for you that’s exactly what a mutual fund does. So, in simple words, a mutual fund means there is a mutual fund manager who takes decisions for your money on your behalf. Which is invested with the mutual fund.

In nutshell, what a mutual fund does? It will collect money from hundreds of people like you and me to put it in the market for which fund manager is in charge. Now this mutual fund is going to reinvest this money into different-different investment opportunities like equity, in debt, or can invest in either or both. So, that depends on the objective of the mutual fund scheme.

what is the positive side of the mutual fund?

Now mutual fund will earn and come out of that and this income earned can be in the form of interest or it can be in the form of dividend and it could be in the form of gain as well difference between costs price and selling price.

So, the earned money goes to mutual fund investors like you and me. However, they are going to take out some portion for their own purpose this is exactly known as management expenses or people call this as an expense ratio this expense ratio could be typically 1% to 3% of your total investment amount.

Types of Mutual Fund

Initially, SEBI approved 5 Basics types of Mutual funds but as we all know, every now & then mutual fund houses come up with something new to confuse common investors.

  1. Equity Mutual Fund: – In this fund money is invested stocks/Share market only.
  2. Debt Fund/fixed income: – In this fund money is invested in fixed income sources like securities, treasury bills and bonds. These funds are tax-efficient too. So, No higher risk as it’s not invested in shares.
  3. Hybrid Fund: – as the name suggests it’s a mix of both Equity and Debt.
  4. Solution-oriented funds: It’s like you invest money for specific targets for example- child marriage/ education/ for a new home.
  5. Other Funds: – Funds like index fund comes under it, where it is directly linked with the market index and some other funds too.

Liquid Fund: –

These funds invest in short-term debt instruments, looking to give a reasonable return to investors over a short period of time. People who are looking at parking their surplus funds over the short-term as an alternative to a savings bank account with better returns opt for it.

You will rarely find people who will tell you, how you can choose a good mutual fund by yourself because if you can decide by yourself which mutual fund is good for you then a lot of companies will go out of business and influencers will sit at home.

Mistakes to Avoid

  1. People invest based on the past return but they do not think about what was their objective of investing.
    Let me explain this by example when you plan to travel for holidays you decide your destination before you move out of your house. Same way in Mutual Funds objective or goal matters because if you are looking for a higher return in a short span of time then you would go for an Equity fund but if you are looking for a moderate return then choosing a Hybrid fund would be better and if you looking for ok returns but the lowest level of risk you would go for Debt fund.
  2. Invest more when the market is down because when the market is down (NAV) Net asset value of the fund will be low and you get the opportunity to buy higher units at less price. Or you can say you have the perfect opportunity to average your risk.
  3. Check Entry and Exit Load: – before investing in any mutual fund. Mutual funds generally don’t have an entry load but an Exit load is there in a few. Let’s say if you start investing and for any XYZ reasons you plan to exit the scheme you may have to pay some money.
  4. Lock-in Period: – Please check the fund in detail whether it has a lock-in period or not generally it’s there with ELSS funds, where you plan to save tax.
  5. Risk to Reward Ratio: – Most of the mutual funds invest in equity and even in debt fund investment goes to unsecured instruments. So, check before investing whether you have the appetite to take that much risk. What all instrument that fund is investing in and also what ratio it is invested in.

Bonus Tip.

Invest through direct fund options like Zerodha, Groww App, etc. because traditional fund investing platforms charge an admin fee or commission over and above fund manager fees. It may seem very small like 0.001% of your investment amount or return amount but in a long run this fee comes out to be in lakhs.

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