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A mutual fund is a pool of funds collected from multiple investors which invests in assets like stocks and bonds. Mutual funds are managed by Asset Management Companies (AMCs). Each AMC will typically have several mutual fund schemes. The total size of the mutual fund industry in India crossed Rs 23 lakh crore in 2018.

Why Mutual Funds?

Liquidity: You can buy and sell most mutual funds on any business day. This is unlike bank fixed deposits, PPF or Insurance Policies.

Diversification: A mutual fund gives you exposure to a basket of stocks and bonds at a very low cost. If you had to buy them directly, you would need to invest a much larger sum of money.

Low Cost: Mutual fund expense ratios are typically 1.5-2.5% of your investment. This amount pays for fund administration, fund manager fees and much else. This is possible because these costs are spread between hundreds of different investors.

Transparency: Mutual funds are tightly regulated by the Securities and Exchange Board of India (SEBI) and their NAV (Net Asset Value) is disclosed on a daily basis. Their portfolios are also disclosed each month and various other details about are available in the public domain.

How to Select a Mutual Fund?

You must first select a fund category. Broadly, equity funds should be chosen if you are willing to take a high level of risk and have a time horizon of more than 5 years. For a moderate risk appetite, you can look at hybrid funds. If you have a low risk appetite, you can stick to debt funds. Note that all mutual funds, even debt funds carry some risk.

Once you have chosen a fund category, you can select an individual fund by comparing its performance to its benchmark and peers over a reasonably long period of time. A few other factors that you can also consider are:

Fund Manager Experience - How long the fund manager has been in charge and what is past track record shows

Portfolio - Is the mutual fund getting high returns by investing in very risky, small companies? Is it getting its returns through asset allocation? What is the debt-equity split in the fund?

Expense Ratio.- A high expense ratio eats directly into your returns and will reduce the wealth creating potential of the fund.

Want to know which funds have been shortlisted by our research? Sign up for an account with Paisabazaar using the form above.

How to Invest in Mutual Funds?

You first need to complete KYC (know-your-customer) which is a one-time identity verification process. The process involves submission of identity and address documents such as Aadhar and PAN Card. At Paisabazaar, the entire KYC process is conducted online. Once your KYC is done, you need to select a mutual fund and submit a purchase request along with payment. At Paisabazaar you can do this online as well, keeping paperwork and hassle to a minimum.

Simply fill up the registration box above and follow the steps mentioned, for online investment.

Mutual Fund Eligibility

Anyone can invest in mutual funds. The minimum investment can be as low as Rs 500. Both resident Indians and NRIs (Non-resident Indians) can invest in mutual funds. You can also invest in the name of your spouse or kids. If your child is a minor (below 18), your details have to be mentioned while investing and you operate the account till he or she turns 18. Even partnerships, LLPs, Trusts and Companies can invest in mutual funds.

Q. Is it safe to invest in mutual funds?

Ans. Mutual funds are market-linked investments and thus they can never be completely risk free. However they are high regulated and diversified investment products, which greatly reduces the risk in them compared to stocks or even individual bonds/ NCDs.

Q. How do you make money from a mutual fund?

Ans. There are two major mechanisms of making money through a mutual fund – accrual and growth. In the accrual strategy, the investor invests and earns dividends from the scheme over time. At a later date he/she may decide to liquidate those units for a profit too. The accrual strategy is preferred by investors seeking income while staying invested. The growth strategy does not generate any returns while the investor holds units, but the value of the units usually increases over time and can provide future gains when the units are redeemed. Note that after the 2018 Budget, the growth strategy is more tax-efficient than the accrual strategy.

Q. What is the right time to invest in mutual funds?

Ans. Various studies have shown that ‘time in the market’ matters more than ‘timing the market.’ The right time to invest in mutual funds is NOW. Do not wait for a market correction or you may be left waiting a long time. Corrections are very hard to predict and time correctly. Instead, figure out your goals and risk appetite and invest without delay.

Q. Can you lose all your money in a mutual fund?

Ans. Being market linked, there is some risk of loss with respect to mutual funds including loss of the principal amount invested. However the chances of losing all your money are low because of high levels of diversification and transparency.

Q. How do growth stock mutual funds work?

Ans. There is nothing called growth stock mutual funds, however there is a growth option in case of mutual funds. In the growth option, gains come from growth in the value of the fund rather than through dividends. The gains can be realised when the investor sells his mutual fund units.

Q What is the average rate of return on a mutual fund?

Ans. Over the long term, equity schemes have provided annualised returns of around 12% on average, debt schemes around 8% and hybrid schemes around 10%. However as these are market-linked investments, the previous performance of mutual fund schemes does not guarantee future returns.

Q. How do you calculate mutual fund returns?

Ans. The absolute growth rate of mutual fund schemes is obtained using the formula (total gains/principal invested) x 100. In case of multi-year investments, returns are annualised if returns over 1 year are considered. This is done by calculating the Compounded Annual Growth Rate (CAGR).

Q. What is NAV and how is NAV calculated?

Ans. NAV is the acronym for net asset value and it represents the price of individual mutual fund units. NAV is calculated using the formula = (total fund assets - total fund liabilities)/ Total number of outstanding units of the scheme. You can read more about it here.

Q. What is the average interest rate for a mutual fund?

Ans. Mutual funds are market linked investments and do not provide guaranteed returns. Hence there is no interest rate for a mutual fund. Returns are not guaranteed but they are potentially higher than various fixed return investments currently available in the market.

Q. How much money do you need to start investing in a mutual fund?

Ans. The minimum investment amount may differ depending upon the fund you intend to invest in. But, the absolute minimum investment that you can start with, can be as low as Rs. 500.

Q. Can I sell a mutual fund anytime?

Ans. Most mutual funds are open ended, meaning that you can sell them at any time. Close end schemes have a lock-in, typically 3-4 years in length. After this period, they mature and you cannot simply extend them as per your wish. There is a third set of schemes which have a lock-in but become open ended after the lock-in. For instance tax saving or ELSS fund have a lock-in of 3 years. After this time-period, you can sell these funds at any time.

Q. Is investing in mutual funds tax free?

Ans. No. Mutual funds are subject to short term capital gains (STCG) and long term capital gains (LTCG) taxation rules. Different mutual fund categories are taxed differently such as equity and debt. In case of mutual fund dividends, the Dividend Distribution Tax (DDT) become applicable and is deducted at source by the fund. You can read more about mutual fund taxation, here.

Q. Open Ended or Close Ended Funds?

Ans. Open ended funds give you flexibility. You can invest in them and exit them on any business day. However due to their nature, they can bet hit by large, sudden redemptions. Close ended funds are inflexible. You can buy them from the AMC only during the New Fund Offer (NFO) period and exit when the fund matures. However their closed nature safeguards the fund manager from the pressure of large redemptions and allows him to focus on delivering returns.

Q. SIP or Lumpsum?

Ans. Systematic Investment Plans or SIPs invest a fixed amount in a mutual fund at regular intervals. For example Rs 10,000 in invested in a mutual fund each month. SIPs spread your investment and protect you from catching a market high (bad timing). They also average out your purchase price, reducing your risk. SIPs work best with equity funds and not debt funds.

Lumpsums are a one-time investment. You should go for lumpsums only if you are highly confident of the fund you are investing in. If the fund’s NAV rises continuously, a lumpsum rather than SIP will maximise returns. In case of debt funds, interest is accrued on an ongoing basis making lump sum investment in them more efficient than SIPs, broadly speaking.

Q. Direct or Regular Plans?

Ans. Regular Plans include distributor commissions. These commissions range from 0.5-1% of the fund value. In other words, 0.5-1% of your investment is paid out to the distributor for these plans, every year. Direct Plans do not include distributor commissions.

Q. When should you sell a mutual fund?

Ans. You should sell a fund if:

It starts underperforming its benchmark and peers on a sustained basis.

The time for which you invested, has come to an end. For instance, you have invested for your children’s education and their college fees have become due.

The goal for which you invested has been attained. For instance, you invested to buy a home and a large enough sum has accumulated to fund your home purchase.

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