A mutual fund is a pool of money created by the contributions of several investors. It is managed by a company called an Asset Management Company (AMC). It is held separately from the funds of the AMC and hence is not directly affected by the financial health or profits of the AMC. In other words, a mutual fund will not go bankrupt if the AMC goes bankrupt. The AMC can invest this pool of money in different assets such as stocks, bonds and gold depending on the fund’s mandate. It is regulated by the Securities and Exchange Board of India (SEBI).
Here’s a five-step guide to investing a mutual fund:
KYC or know your customer is a mandatory requirement for all fund investors. It is a one-time process and does not have to be repeated every time you invest in the fund or in a new fund. You need to furnish identity proof and address proof at an investment service centre run by CAMS or Karvy. Your details must also be verified ‘in person’ by a distributor or AMC representative who has the relevant NISM certification and completed the know-your-distributor (KYD) process. Alternatively, you can do webcam based KYC in which you verify your identity and documents via webcam with an authorized agent. This facility is offered by Karvy and a few mutual funds such as Quantum, Sundaram BNP Paribas and Reliance Nippon.
You should select a fund based on your risk profile and time horizon. Go for equity funds if you have a time horizon of five years or more and are have a good risk appetite. Otherwise, stick to debt funds. If you have a long time horizon but not a very high-risk appetite go for hybrid funds such as Equity Savings Funds, Dynamic Equity Funds or Balanced Funds.
Mutual Funds offer three types of options – growth, dividend payout and dividend reinvestment. In most cases, the growth option is more efficient from both an investment and a tax point of view. We provide a more detailed explanation of this, below.
You can choose a regular plan or a direct plan. A regular plan pays out a distributor commission while a direct plan does not pay out a commission. Thus a direct plan carries lower costs than a regular plan but comes without a distributor’s services. Pick the regular plan if you need these services such as information about funds, help in transacting and help with keeping records. If you do not need help, invest in a direct plan.
You can invest in a number of ways. You can fill up physical forms and submit them along with cheques at the local office of the mutual fund or the local office of the fund’s registrar (CAMS or Karvy). Alternatively, you can invest online here. Mutual Fund Fees, Charges and Expenses All mutual fund charges, fees and expenses are embedded in a figure called ‘expense ratio.’ The expense ratio is the ratio of total expenses to the net assets of the scheme. Mutual Funds – Modes of Investment