A mutual fund is a pool of money that is invested in stocks, bonds or both. A mutual fund has a more diversified portfolio than a single stock and is hence less risky. A mutual fund is managed by a professional fund manager.
It is regulated by the Securities and Exchange Board of India (SEBI). A certain category of mutual funds called ELSS funds gives you a tax deduction under Section 80C on investments up to Rs 1.5 lakh.
Here is an overview of the advantages of investing in Mutual Funds and the suitable funds for beginners:
Advantages of Mutual Funds
Professional Management
Mutual Funds are managed by Asset Management Companies (AMCs). These companies have to satisfy certain capital and experience requirements. They are run by professional fund managers who are highly qualified in finance and experienced in analyzing stocks and bonds.
Growth/Wealth Creation
Historically, mutual funds have given extremely high returns. The return on large cap funds over the past 10 years has averaged at 14.97%. Midcap funds have given 21.79% and small cap funds have given 20.47%. Over the long run, the return given by equity funds is close to the nominal growth rate of the economy.
Safer than owning direct stocks
Mutual Funds are subject to a host of regulations made by the Securities and Exchange Board of India (SEBI). According to SEBI rules, a mutual fund cannot invest more than 10% of its portfolio in a single stock. The sponsor of a mutual fund must have at least 5 years’ experience in financial services, positive net worth for 5 years and must be a ‘fit and proper person’ as determined by SEBI.
Top Performing Mutual Funds
| Fund | 3 year returns | 5 year returns |
| Axis Bluechip Fund | 20.27% | 11.79% |
| PPFAS Long Term Equity Fund | 13.71% | 11.60% |
| HDFC Small Cap Fund | 9.81% | 9.93% |
| Franklin India Prima Fund | 9.37% | 10.46% |
| Axis Long Term Equity Fund | 16.74% | 12.35% |
Source: Value Research, Data as on 10 December 2019
How to Invest in Mutual Funds?
In order to invest in Mutual Funds, there are a few steps which are to be followed accordingly:
- Get your KYC Done
KYC or Know Your Customer is a procedure meant to establish your identity and address. For KYC you need to submit documents such as PAN Card, Aadhaar Card, Bank Statement/Passbook, Voter’s ID, Ration Card, Electricity Bill, etc. KYC can either be done by meeting an authorized agent of a mutual fund distributor (such as a bank relationship manager) or virtually through webcam.
- Choose a fund
Pick a fund that fits your time horizon and risk appetite. If you are investing for 5 years or more choose an equity fund such as a fund from the list mentioned above. If you are investing for a lower time period or you do not want to take a lot of risk, choose a liquid fund like Axis Liquid Fund. If your time horizon is 1-3, you can also consider short duration funds like HDFC Short Term Debt Fund.
- Regular or Direct
Decide between the regular plan and the direct plan of the mutual fund. A regular plan will include distributor commissions while a direct plan will not include commissions (this makes direct plans cheaper by up to 1% per annum).
- Submit the form online/offline
Fill up the purchase form and submit it along with a cheque at your nearest office of that particular mutual fund. Alternatively, you can simply register and invest through online platforms like Paisabazaar.
- Rebalance
Review your portfolio every 3-6 months and re-balance when necessary. Exit from funds that are under-performing for a sustained period (3 years or more) and move into mutual funds that are delivering strong performance.