How to Invest in Mutual Funds Online: Types, Benefits & Taxation

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Achieving your long-term financial goals requires more than saving money in a traditional way to grow your wealth over a savings account. It necessitates a well-thought-out investment strategy that has the potential time. Mutual Funds are one such avenue that has captured the attention of investors worldwide. Let’s look at mutual funds basics.

A mutual fund is an investment that gathers funds from numerous investors to buy a diversified collection of bonds, stocks, or other securities. Managed by professionals, these funds provide an easy gateway to the financial markets, making them a suitable option for novice and seasoned investors.

However, understanding Mutual Funds can be challenging for those new to investing or seeking to expand their financial portfolio. That is where this article comes in. This article will discuss the various types of Mutual Funds, the reasons behind investing in them, and how to invest in Mutual Funds online.

How to Invest in Mutual Funds in India

Opting for mutual fund investments in India is a smart approach to wealth accumulation. The process is straightforward. You just have to follow these steps:

Step 1: Risk Profiling

First, understand your risk tolerance. Do you lean towards high-risk investments or prioritise safety? Risk tolerance is crucial in determining the most suitable Mutual Funds for your investment portfolio.

Step 2: Asset Allocation

Determine your preferred allocation strategy for diversifying your investments among various asset classes, such as stocks, bonds, and cash. This diversification can help manage risk. Still, do not forget to consider the preferred mutual fund’s expense ratio.

Step 3: Identify Suitable Funds

Research and identify Mutual Funds that align with your investment goals and risk profile. Look at past performance, expenses, and fund managers' track records.

Step 4: Select a Mutual Fund Scheme

Once you have found suitable funds, choose the scheme you want to invest in. Each scheme may have different features and objectives.

Step 5: Diversify and Monitor

Spread your investments across multiple funds to further reduce risk. Regularly monitor your investments and adjust to stay on track with your financial goals.

Types of Mutual Funds

Mutual Funds offer various options to suit investors' preferences and financial goals. Understanding the various types of Mutual Funds will help you make sound financial selections. The types of Mutual Funds in India are categorized as follows:

Based on the Assets

1. Equity Funds

These funds primarily invest in stocks or equities. These investments provide the potential for significant long-term returns, albeit with increased fluctuations. Equity funds are divided into large-cap, mid-cap, and small-cap categories based on the size of the companies they target for investment.

2. Debt Funds

Debt Mutual Funds primarily invest in fixed-income securities such as corporate bonds, government bonds, and money market funds. They are less risky than equity funds and provide consistent income through interest payments. Yet considering taxation on debt mutual funds is advisable.

3. Hybrid Funds

These combine both equity and debt investments. They offer a balanced mix of risk and return, making them suitable for investors seeking a middle-ground between safety and growth.

Based on the Structure

1. Open-Ended Funds

Open-ended Mutual Funds do not have a fixed maturity date, allowing investors to enter and exit anytime. They are famous for their liquidity; you can buy or sell units directly from the fund house.

2. Closed-Ended Funds

Closed-ended Mutual Funds have a set maturity time ranging from 3 to 7 years. Investors can only purchase units during the first offering period, after which they can be exchanged like stocks on stock markets.

Based on Investment

1. Index Funds

These funds seek the performance of a certain stock market index, such as the Sensex or Nifty 50. They have reduced costs and are suited for passive investors looking to

replicate market returns.

2. Tax-Saving Funds (ELSS)

Equity Linked Saving Schemes (ELSS) are tax-saving Mutual Funds with a mandatory three-year lock-in period. These investment instruments provide tax advantages under Section 80C of the Income Tax Act in India and are widely favoured for tax planning purposes.

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Why should you Invest in Mutual Funds?

Investing in Mutual Funds can be a wise financial move, offering several compelling reasons to consider:

1. Diversification

These funds spread their investments across a broad spectrum of asset classes and stocks, effectively minimising risk through portfolio diversification. As a result, when a specific asset or stock doesn't perform as well, the positive performance of other assets can counterbalance the loss. This potential balancing act enables investors to experience favourable returns on their investments. To add an extra layer of risk mitigation, one can diversify even further by investing in different categories of Mutual Funds.

2. Professional Management

Skilled fund managers handle the day-to-day management of the fund. They analyse market trends, select investments, and adjust, leveraging their expertise to maximise returns.

3. Enhanced Returns

Unlike FDs and RDs, Mutual Funds can yield superior returns due to diversified investments. Equity Mutual Funds offer high returns but have higher risks, ideal for risk-tolerant investors. Debt funds, with lower risk, still outperform deposits.

4. Cost-Efficient

Mutual Funds offer a cost-effective entry point with investments as low as ₹5,000 for lump sum and ₹500 for monthly SIPs, eliminating the need to amass a substantial sum before you can start investing. Opting for a Direct Plan in a mutual fund scheme eliminates the necessity of paying extra commissions to distributors or agents. Additionally, mutual funds taxation benefits help you save more on the earned profits in the long term.

5. Structured Investing

Mutual Funds offer a disciplined approach via SIP (Systematic Investment Plan), allowing small, regular contributions - weekly, monthly, or quarterly. Set up auto-debit for convenience, automatically deducting funds from your account. SIP simplifies consistent investing.

Conclusion

Investing in Mutual Funds offers a potent strategy for building wealth, reaching your financial objectives, and ensuring a stable future. It's essential to understand that investing in Mutual Funds is not a short-term endeavour but rather a long-term commitment. Review and adjust your portfolio to align with your goals and risk tolerance.

Frequently Asked Questions (FAQs) on Mutual Funds

Q1. Can I buy Mutual Funds myself?

You can buy Mutual Funds through various platforms like banks, online brokerage accounts, or fund houses.

Q2. How do I start investing in Mutual Funds?

Start investing in Mutual Funds by selecting a fund, completing the required paperwork, and investing the minimum amount per the fund's guidelines.

Q3. Can I withdraw my money from Mutual Funds at any time?

Yes, you can withdraw your money from Mutual Funds anytime, but some funds may have exit loads or lock-in periods. You must check the fund's terms for these details.

Q4. What are the common mistakes to avoid when investing in Mutual Funds?

There are several common mistakes that you must avoid when investing in Mutual Funds. The mistakes are:

Neglecting to diversify your portfolio.
Not understanding risk.
Ignoring fees.
Not reviewing your portfolio regularly.

How to Invest in Mutual Funds