Mutual Funds have gained immense popularity over the past decade due to the variety of options (catering to the needs of every investor) plus, owing to the fact that they have delivered better returns than some of the traditional investment instruments, particularly bank fixed deposits. During the last quarter, for example, bank fixed deposits reported a growth of 5.3% (despite the withdrawal of Rs 2,000 bank notes), while mutual funds 6.4% quarter-on-quarter in Average Assets Under Management with charging bulls having taken Indian equities to new lifetime highs and drawn the attention of many new investors. Everyone wants to know how to invest in mutual funds. Well, this article will walk you through the process of investing in mutual funds, the parameter to look at to select the best mutual funds, and the strategy to follow when investing in mutual funds.
First, let’s go through the process of how to invest in mutual funds.
The process of investing in mutual funds has become simple and convenient over the past few years. Broadly, you could invest in mutual funds offline or online.
a) Offline Mode of Investing in Mutual Funds
You can invest in mutual funds offline by visiting the nearest branch of a mutual fund house or through a mutual fund distributor/agent or broker. Today even banks offer third-party investment products such as mutual funds. But, in my view, be careful about investing in mutual funds through banks — as they often keep their interest first before yours, the investors. They ‘sell’ schemes based on past returns plus those earning higher commissions for the bank (by recommending Regular Plans) rather than prudently considering which mutual fund schemes may be suitable for you.
When going through the offline mode, ideally, it makes sense to seek the services of a SEBI-registered investment adviser who follows an unbiased approach, considers your needs, and accordingly recommends not just the best but also suitable mutual fund schemes and preferably the Direct Plan.
Under the offline mode, as regards the documents, you will be required to submit:
– Duly filled complete application form
– A cheque or bank draft in favour of the mutual fund scheme
– And other relevant documents, viz., proof of identity (Aadhaar/PAN/Passport/Driving License, etc.) and proof of address (Aadhaar/Ration Card/Voter Id, Passport/Driving License, etc.)
The aforesaid documents are mainly required to be ‘Know Your Customer (KYC) compliant’. KYC compliance is a one-time exercise while dealing in securities markets. Once KYC is done through a SEBI-registered intermediary (broker, DP, Mutual Fund, etc.), you, the investor, need not undergo the same process again when you approach another intermediary.
KYC compliance for investing in mutual funds (and other financial instruments) is mandatory under the Prevention of Money Laundering Act 2002. It is vital compliance on the part of financial product manufacturers to know their investors better and to prevent misuse of funds.
b) Online Mode
If you want to avoid the hassle of visiting a mutual fund office or the mutual fund distributor/agent or broker or bank, you can choose to invest in mutual funds online from the comfort of your home, office, cafe or wherever you are.
Here are the different ways in which you can invest in mutual funds online…
1) Investing in mutual funds online directly with the mutual fund house
You can buy mutual fund units online directly from the respective websites or official apps of the respective mutual fund houses. But if you are a first-time investor, make sure that you have completed the KYC process before investing. KYC process can also be completed online with OTP-based Aadhar authentication.
Once the KYC process is complete, you can proceed to invest in the scheme of your choice (equity, debt, hybrid, etc.) by following the below process:
- Open a new account with the mutual fund house by providing relevant personal details, – viz., name, address, contact number, e-mail ID, etc.
- Fill in the required mandatory investment details such as…- The scheme name of your choice- Select the plan type (Direct/Regular) and option (Growth/Dividend)- Mode of investment – lumpsum or SIP, etc.- Enter the amount you wish to invest and the frequency (monthly, quarterly, etc., in case of SIP)
- Provide bank account details through which you will transact and the mode of payment — net banking, debit card, etc.
- Verify and complete the transaction.
Do note that if you are investing in schemes belonging to different mutual fund houses, you will have to perform the same procedure with each of them. Thus, this process could be complex and time-consuming.
2) Investing in mutual funds online through mutual fund Registrar & Transfer Agents
To make online investments in mutual funds hassle-free and convenient, the Registrar & Transfer Agents (RTAs) of mutual funds such as CAMS and KFintech also offer the facility to invest online through the myCAMS app, kfinkart app, and MF Central. The first two allow transacting in mutual fund schemes that are empanelled with CAMs and KFinech, respectively, while MF Central brings to you ease, convenience, and speed to your service requirements across all the mutual funds, offering an entire expanse of the mutual fund universe.
3) Investing in mutual funds online through Mutual Fund Transaction Aggregation Platforms
Mutual fund transaction aggregators provide browser-based access to Mutual Fund’s customers, with connectivity to Registrars and Transfer Agents (RTA), Banks, Asset Management Companies (AMC), Payment Gateways (PG), and KYC Registration Agencies (KRAs) and enable online transaction submission in multiple schemes across mutual funds.
MF Utilities (MFU) and BSE StAR MF are among the widely known mutual fund transaction aggregators. MFU is operated by MF Utilities India Pvt. Ltd. (MFUI), which is equally owned by the Participating AMCs, and was launched under the direction of the Association of Mutual Funds in India (AMFI). All schemes of these participating AMCs are available for transaction/investment under the MFU portal. MFU allows choosing between Direct and Regular Plans of mutual funds schemes.
The BSE StAR MF, on the other hand, only allows transacting under the Regular Plan. This platform can be used only by registered Brokers, MF Distributors, RIAs etc. This platform is not available for individuals who want to invest directly in mutual funds. The platform is packed with features, extremely flexible, connects with both the depositories, i.e., NSDL and CDSL, and is set up to hold both mutual funds in physical and demat form.
4) Invest in mutual funds online through a Stock Broking Account
If you have an existing Demat account, it can be used to invest in mutual funds online directly via the online stock broking account. All you ought to do is just log in to your broking account and look for the option to invest in mutual funds. Then proceed to select the scheme you want to invest in. Thereafter, enter the investment amount, verify, and complete the transaction. The mutual fund units will be credited directly to your Demat account once the process is complete.
Investing in mutual funds using the Demat account allows you to invest and track all your mutual funds, equities, and bonds in one place. However, do note that additional charges may be applicable when you invest in mutual funds through a Demat account, such as annual maintenance charges, transaction charges, etc.
5) Invest in mutual funds online through other Fintech Platforms
In this day and age of technology, various other fintech investment platforms are available to invest in mutual funds online. These mutual fund investment platforms offer single-point access and help in comparing mutual funds online to zero in on the best suitable ones. Besides, with a well-designed dashboard, they enable you to keep track of your mutual fund investments.
To invest in mutual funds online through a fintech investment platform, broadly, the following steps need to be followed:
- Create an account with the respective fintech investment platform (of your choice)
- Fill in your personal details such as name, PAN, Aadhar, bank account details, etc.
- Some ask you to answer a few questions to judge your risk profile (to recommend certain categories of mutual fund schemes)
- Select the mutual fund scheme of your choice (you can also select multiple schemes)
- Choose the mode of investment (SIP or lumpsum) and the amount
- Make the payment to complete the investment
As far as possible, prefer the Direct Plan over a Regular Plan, particularly when investing in mutual funds online.
Why choose a Direct Plan over a Regular Plan of mutual fund schemes?
The Securities and Exchange Board of India (SEBI) introduced Direct Mutual Fund Plans in January 2013. It made it mandatory for all mutual fund houses to launch ‘Direct Plans’ for all schemes. As the name suggests, Direct Plans allow you to invest in mutual funds directly without any middleman (distributor, agents, etc.). Thus the expense ratio of the Direct Plan is lower than that of the Regular Plan (since mutual fund houses do not have to pay commissions to distributors). You see, even a 1% difference in the expense ratio of the Direct Plan and the Regular Plan can make a huge difference to the investment corpus you will build over a period of time compared to the investment in a Regular Plan.
How to Select the Best Mutual Funds for Your Investment Portfolio?
When selecting mutual fund schemes, avoid making the investment decision just based on past returns. If the past returns of a mutual fund scheme have been appealing, not necessarily it would be repeated year after year (and likewise with poor returns). You need to select mutual fund schemes prudently evaluating a host of quantitative and qualitative parameters, such as…
- Returns over various time frames (6-months, 1-year, 2-year, 3-year, 5-year, 10-year, since inception)
- Performance across market phases (i.e. bull and bear phases)
- Performance across interest rate cycle (in the case of debt mutual funds)
- The current interest rate cycle (in the case of debt mutual funds)
- Risk ratios (Standard Deviation, Sharpe, Sortino, etc.)
- The expense ratio of the scheme
- Portfolio characteristics (the top-10 holdings, top-5 sector exposure, how concentrated/diversified is the portfolio, the market capitalisation bias, the style of investing followed – value, growth, or blend, the portfolio turnover, and in the case of debt mutual funds the quality of debt papers held, the average maturity, and modified duration)
- The quality of the fund management team (the experience of the fund manager, the number of schemes he/she manages, the track record of the mutual fund schemes under his/her watch, and the experience of the research team)
- Also, the overall efficiency of the mutual fund house in managing investors’ hard-earned money (i.e. the proportion of AUM actually performing)
Analysing a mutual fund scheme in the above holistic manner shall help you gauge the risk-return potential of a fund, i.e. how it would perform in the future, and choose among the consistent performers. Don’t just go with star ratings, which are usually given based on returns and do not necessarily help in identifying consistent performers.
Watch this video: The SMART Method to Pick the Best Mutual Funds for Your Portfolio
Furthermore, always make it a point to consider your age, risk profile, investment objective, financial goals you are addressing, and the time in hand before the envisioned goal/s befall to make a suitable choice.
Strategy to Follow When Investing in Equity Mutual Funds
Given that Indian equities have scaled to a new lifetime high, and valuations aren’t cheap, avoid getting carried by irrational exuberance and unrealistic earnings estimates. It would be unwise to get carried away and skew the mutual fund portfolio to midcaps and smallcaps. Note that if the equity market corrects, these may tend to fall more.
At present, consider following a Core & Satellite strategy, wherein typically allocate around 65%-70% of the equity portion in the best Largecap Funds, Flexi-cap Funds/Multi-cap Funds, and Value/Contra Funds as part of the ‘core portfolio’. They shall add stability to the investment portfolio and potentially multiply wealth. But make sure to keep an investment horizon of at least around 5 years.
For the ‘Satellite’ portion of the portfolio, up to 30%-35% of the equity portion may be held in a couple of best Mid-cap Funds (max 2) and an Aggressive Hybrid Fund. And only if your risk appetite is very high a small cap fund may be considered. The satellite portion may potentially push up the overall returns of the portfolio. That being said, when approaching smallcap and midcap funds, keep a longer horizon of 5-7 years or more. A longer time frame may alleviate the downside risk if the broader markets correct in the near term.
Such a ‘Core & Satellite’ investment strategy shall prove sensible when deploying money into equity funds. It is a strategy followed by some of the successful equity investors across the globe.
To make fresh investments at a market high, consider making staggered lumpsum investments, or even better opt for the Systematic Investment Plan (SIP).
If you do not possess the skills or the knowledge to pick the best and most suitable mutual fund schemes, it is advisable to seek the services of a SEBI-registered investment adviser.
This article first appeared on PersonalFN here