How Beginners Should Invest in Mutual
Funds

In Investing world, it is believed that mutual funds are one of the easiest and most convenient ways for beginners to start growing their money. However, the more options, the more confusion. This is what exactly happens to new investors, who want to start their journey. If you utilize mutual funds correctly, they may help you achieve your financial goals, reduce risk, and build a diversified portfolio.

For those who are new to investing, this is a basic guide to mutual funds.

Understanding “WHAT” & “WHY” make your action purposeful.

WHAT are Mutual Funds?

Let’s take an example of travel. 50 individuals want to go Mumbai. Instead of travelling along by car, they decided to go by a bus. Bus driver pick up each passenger and drives them to the common destination i.e. Mumbai.

Similarly, Mutual funds collect money from multiple investors to invest the same in different assets such as Shares, Gold, Bonds, Real Estate etc. as per the requirement of an investor. Instead of investing directly in stock market (which is riskier for new investors), they invest money in a Fund wherein a Fund Manager applies his expertise and experience and invest money effectively.

In Mutual Funds, every investor owns units of the mutual fund. It represents a proportion of the holdings. The beginners don’t have the experience or knowledge of the stock market, hence professional fund managers make the investment decisions on behalf of investors. In view of the same, mutual funds is a smart choice for beginners.

WHY Mutual Funds?

Mutual Fund investment is the most flexible investment avenue.

• You can start investing with just Rs. 100/-
• You can decide investment frequency (daily, weekly, monthly, half-yearly, yearly)
• You can start investing anytime without any charges and withdraw your money any time. (for few funds exit load is applicable)
• Further, you can decide Asset Allocation (Equity, Debt, Cash, Metal, Real Estate)
• You can also diversify investment across different sectors and countries
• In long-run Mutual Fund will help you beat inflation and can offer you higher returns

Hence, WHY NOT Mutual Funds?

How to Start?

Investing as per your Financial Goals is important:

Before investing, it’s important to analyse your financial goals.

• Set a target (retirement, a car, a home, vacation, children’s education)
• Decide the time frame and the amount
• Understand how much risk you can take with your money?

Knowing your goals is you “WHY” in investing which will help you select the right asset allocation and mutual fund. For example, if you’re saving for a long-term goal like house purchase after 8 years, an equity mutual fund can be a better option due to its potential for higher returns over long time. 

Understand the Types of Mutual Funds:

In a very broad perspective, there are 4 different types of mutual funds based on the investment. Here are the main categories:

• Equity Mutual Funds: Investment in stocks and are suited for long-term. Probability of higher returns but has a higher risk.
• Debt Mutual Funds: Investment in Government/corporate bonds and fixed-income securities, considered safer but generally offer lower returns than Equity.
• Hybrid Mutual Funds: Investment in both i.e. equity and debt, providing a balance between risk and return. Good for moderate-risk investors.
• Index Mutual Funds: Investment in a specific market index like the Sensex/ Nifty. They are passively managed. They are less expensive and lower-risk than actively managed funds.

Type of Investment: Start Small by using technique of Systematic Investment Plans (SIPs)

A Systematic Investment Plan (SIP) is among the greatest strategies for beginners to invest in mutual funds. SIPs make it simple to start with small sums by allowing you to invest a set amount at regular intervals (often monthly). This strategy has a number of benefits:

• It is affordable: You can start with as little as Rs. 100/- per month.
• Cost Averaging: By investing consistently over time, you end up buying more MF units when prices are low and lesser units when prices are high, averaging your cost over time.
• Discipline and consistency: SIPs help you inculcate a habit of saving and investing regularly.

Analysing and Comparison of Mutual Funds

Some important points to loot at about Mutual Funds before investing are stated below.

• Fund Performance: Historical performance of the fund over 5, or 10 years. However, remember that past performance does not guarantee future returns.
• Expense Ratio: Lower the better. Generally, Equity Mutual Funds charges higher expense ratio as compared to Debt and Index funds.
• Experience and track record of the Fund Manager
• Risk and Volatility: Different mutual funds come with different levels of risk. Equity is having higher risk with a probability of higher returns as compared to debt.

You can find out the information on Mutual Fund website or on different online MF platforms.

Diversify Your Investments:

One of the most important financial concepts is diversification. To lower risk, it entails distributing your assets among several asset types. Even though mutual funds are diversified, you may increase your diversification by investing in a variety of funds from other categories, such as debt, equity, and hybrid funds. In this manner, your entire portfolio is less affected if one sector does poorly.

Stay Invested for the Long Term (especially in case of Equity)

Even if you are a beginner, set a target of at least 7-8 years to hold on the investment. First set a long-term goal and start Equity investment. Amount of investment does not matter every time, consistency, discipline, and period of investment is what matters the most, in case of beginner.

Investment is not a One-Time Activity. Review and Rebalance Regularly

It’s crucial to frequently assess your portfolio after you begin investing. The performance of the market may cause your asset allocation to change over time. You might need to rebalance—sell some of your growing investments and purchase others—if the allocation switches off course from your initial strategy. Reviewing your portfolio once a year is advised by the majority of experts.

Do NOT hesitate to ask for Professional Guidance, if needed:

A financial advisor could be a good resource to contact if you’re not sure where to begin. In order to suggest appropriate mutual funds, a professional adviser may assist in evaluating your financial status, risk tolerance, and goals. They can also help with long-term planning and walk you through the paperwork.

To Sum-Up:

Trust me, mutual funds are for beginners who want to start their journey of investing. You may progressively increase your wealth over time by knowing your objectives, beginning with modest contributions through SIPs, and routinely assessing your portfolio. Keep in mind that investing requires time and persistence; it’s not a sprint.

You will be well on your way to making knowledgeable and secure judgments regarding your mutual fund investments if you adhere to our instructions. Have fun with your investments!