This blog answers the following questions:
Why should I invest in mutual funds?
Why shouldn’t I invest in mutual funds?
Which is the best mutual fund to invest in?
What types of mutual funds are there?
What is a direct mutual fund?
What is a regular mutual fund?
What is an asset management company?
How do I pick a mutual fund?
What should I avoid?
How should I buy a direct mutual fund?
Are there situations where I could benefit from buying a regular mutual fund?
What about taxes?
Why should I invest in mutual funds?
Because inflation reduces the value of your money over time.
Because you may not have the time to monitor your investments on a regular basis
Because you have time to achieve your financial goals, enough to let my money grow.
Why shouldn’t I invest in mutual funds?
You may not have any long-term financial goals.
You may want to spend all your money as soon as you get it and don’t care about the future.
You are happy with the returns you get from fixed deposits.
Which is the best mutual fund to invest in?
There is no best mutual fund. Past performance does not guarantee future returns. You have to make a calculated choice through your own research.
What types of mutual funds are there?
On the basis of the fees charged, there are direct mutual funds and regular mutual funds.
On the basis of what they invest in, there are equity mutual funds and debt mutual funds. There are various other combinations of equity and debt such as hybrid funds or balanced funds, but you should stay away from them. You also have index funds, which copy the performance of the market.
What is a direct mutual fund?
It is when you buy units of a mutual fund directly from the asset management company without the presence of an intermediary or commission charging broker.
What is a regular mutual fund?
It is when a mutual fund is sold to you by an intermediary or broker, agent or someone who is paid a commission to do so. They form the majority portion of the total assets of mutual funds sold in India.
What is an asset management company?
A company hired by a mutual fund to manage the money that it collects from investors like you and me. They handle the day-to-day operations of investing, when to buy, when to sell and what to invest in.
How do I pick a mutual fund?
Do not look only at past returns. They can be misleading, especially in today’s times as everything seems to have good returns as the markets are at all-time highs.
Identify your goals first and the time horizon in which you have to invest.
If you have the patience to invest your money for more than 5 years, go for pure equity mutual funds.
If you want to invest for less than 5 years – pick either debt funds or bank fixed deposits.
Find the cheapest fund for your needs. Look at the total expense ratio of a fund and compare it with similar funds before investing
Buy only direct mutual fund plans.
Pro-tip:
Hire a fee-only financial adviser who does not get compensated on a commission basis from the investments you make, i.e does not sell you regular plans. This ensures that your adviser will not recommend plans with high commission that are only beneficial to them, losing you money in the long run. This may cost you around ₹10,000-25,000 one-time depending on where you live, but it will set you up for a lifetime of learning and growing your investments.
What should I avoid?
Avoid hybrid funds, balanced funds, and sectoral/thematic funds as they are very expensive in terms of fees and have returns that can vary wildly from time to time. These are not suitable for most investors and they should stay away from them.
How should I buy a direct mutual fund?
Directly from the asset management company website, by creating a login and password and validating your KYC status.
Through your DEMAT account.
Are there situations where I could benefit from buying a regular mutual fund?
No. The difference in returns between a direct mutual fund and a regular mutual fund is so significant over the long term, that it makes more sense to pay for the advice upfront in the form of a fee-only financial advisor rather than spend lakhs or even crores because you were too lazy to learn about your money.
What about taxes?
You should always have your own Chartered Accountant or tax advisor to guide you regarding these aspects, but with patience, you can handle this on your own too.
The new income tax website does a good job of educating you about taxes.
In today’s age of the internet, you have no excuse to stay uninformed about your money. Learn about investing, learn about mutual funds, and save the money you would otherwise lose to inflation.