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Investing newbie here: How do I start a mutual fund?

Ramalingam Kalirajan |10874 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Sep 24, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Hari on Sep 23, 2024Hindi

How to start a mutual fund

Ans: Mutual funds pool money from many investors. This pool is then invested in securities like stocks, bonds, or other assets. A professional fund manager oversees the portfolio, deciding where to allocate funds.

Each investor owns shares in the mutual fund, representing a portion of its holdings. Mutual funds are designed for individual investors who prefer not to actively manage their investments.

They are suitable for both short-term and long-term goals.

Below, we discuss how you can start your journey with mutual funds.

Steps to Start Investing in Mutual Funds
1. Set Clear Financial Goals
First, define your financial objectives. Understand what you want from your investments. You may aim for wealth accumulation, children's education, or retirement savings.

2. Assess Risk Appetite
Understand your risk tolerance. If you're comfortable with risks, you might opt for equity mutual funds. For more conservative goals, debt funds could be a safer option.

Evaluating your risk tolerance will guide you in selecting the right type of mutual fund.

3. Choose a Certified Financial Planner
It’s important to consult a Certified Financial Planner (CFP). A CFP provides personalized advice based on your financial situation. They can help you create a plan and choose funds that match your goals.

4. Pick the Right Mutual Fund Category
Based on your risk profile, choose the right fund category. Here are some types:

Equity Funds: Invest primarily in stocks. Best for long-term goals but carry higher risk.
Debt Funds: Invest in fixed-income securities. Suitable for those looking for stable returns.
Hybrid Funds: Combine both equity and debt for balanced risk and returns.
5. Regular vs Direct Plans
Many investors think direct funds save money because they avoid commissions. However, direct funds require active management by the investor. It demands time, knowledge, and regular monitoring.

If you lack expertise, investing through a regular plan via a Certified Financial Planner (CFP) can be better. A CFP adds value by reviewing your portfolio, advising on rebalancing, and helping with tax efficiency.

6. Actively Managed Funds vs Index Funds
While index funds might seem appealing due to lower costs, they simply mimic a stock index. They do not try to outperform the market. Actively managed funds, on the other hand, offer professional expertise to potentially outperform benchmarks.

An experienced fund manager can make informed decisions based on market conditions, which is why actively managed funds might provide better returns.

7. Select the Right Fund
Look at the fund's past performance, but don't rely solely on it. A fund’s track record over a 5-10 year period is a better indicator than short-term performance.

Consider the fund's expense ratio, which impacts your returns. Funds with higher expenses might not always be better performers. Your CFP can guide you here.

8. Decide on Investment Mode
Lump Sum Investment: Ideal if you have a large amount to invest and a long-term horizon.
Systematic Investment Plan (SIP): Allows you to invest a fixed amount monthly. It averages out market volatility and instills financial discipline.
9. Complete KYC Process
Before you start investing, complete the Know Your Customer (KYC) process. This is mandatory for all mutual fund investors in India. You can do this either online or offline through a Registered Investment Advisor (RIA) or your mutual fund distributor.

10. Monitor and Review Regularly
After investing, regularly review the performance of your mutual fund. If it underperforms over an extended period, it may be time to rebalance or switch funds. Your CFP will help assess whether your investments are aligned with your goals.

Mutual fund investments are not set-and-forget instruments. They need periodic monitoring to ensure they’re working towards your financial goals.

Key Considerations Before Investing
1. Time Horizon
Your investment horizon is crucial when selecting a fund. Equity funds are better for long-term goals (5-10 years). For short-term goals (1-3 years), debt funds may be safer.

2. Diversification
Don’t put all your eggs in one basket. Diversifying across different types of funds helps manage risk. Your portfolio should balance growth, income, and capital preservation.

3. Tax Efficiency
Certain mutual funds offer tax benefits under Section 80C, such as Equity-Linked Savings Schemes (ELSS). Additionally, long-term capital gains (LTCG) in equity funds up to Rs 1 lakh per year are tax-free.

Debt funds are taxed differently based on your holding period. For long-term gains (holding over 3 years), you get indexation benefits, which can lower your tax burden.

4. Exit Loads
Exit loads are charges you pay when you redeem or switch mutual fund units before a specific period. These charges vary from fund to fund, so be mindful of the terms before investing.

5. Emergency Fund
It’s essential to maintain an emergency fund. This fund ensures that you do not liquidate your mutual fund investments prematurely during a financial crisis.

Final Insights
Investing in mutual funds is a great way to meet long-term financial goals. You need a proper strategy that matches your risk tolerance, time horizon, and financial objectives. Consulting a Certified Financial Planner (CFP) can help guide your investment journey.

Mutual funds offer the flexibility to invest based on your financial goals, be it wealth creation, retirement planning, or children's education. It’s essential to monitor, diversify, and adjust your portfolio regularly.

Remember, success in mutual fund investing comes from consistency and long-term commitment, not from chasing short-term gains.

Best Regards,

K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.