A Beginner’s Guide to Mutual Fund

The first step towards investing in your maiden mutual fund is special because you are building a corpus for your goal. But a goal without a plan or awareness is just a wish. Most beginners are incognizant of the way to go forward while investing as the mutual fund universe is large and diverse. 

A holistic understanding of these things will help you with the investment process and ensure you pick up a winning bet.

Know Your Goal

Before putting money in your chosen fund, it’s essential for you to have a clear understanding of your goal. Every mutual fund serves a specific purpose, and it’s vital for you to have a 360-degree view of the objective you want to achieve. Knowing it will help you zero in on the right fund. For example, if your goal is to build an emergency corpus, you can bank on liquid funds.

On the other hand, if your goal is to accumulate funds for making a down payment for your car or home, you can look forward to investing in ultra-short-term funds or aggressive hybrid funds that offer you the best of both worlds - equity and debt. 

Alternatively, if you are eyeing long-term objectives such as children’s higher education and your retirement, it’s advisable to invest in equity funds that have the potential to deliver inflation-beating returns. 

Understand Your Risk Appetite

Mutual funds are market-linked products and hence risky. Though the quantum of risk varies across funds, all of them carry some amount of risk. The riskometer associated with each fund helps you gauge the risk element. What’s vital is to make sure that the risk of a fund matches your risk appetite.

Risk appetite refers to your ability to stomach the risk, and there’s little point in choosing a fund with a higher risk quotient than yours. If even the slightest market upheaval makes you nervy and you lose your sleep, it’s better to choose a fund with a higher debt component and vice versa. 

However, note that even debt funds are not entirely risk-free. So, make sure you have an accurate estimate of your risk tolerance and opt for a fund accordingly.

Look at the Fund’s Long-term Performance

Before investing, it’s essential to look at the long-term performance of your chosen fund. Find out how it has performed against its benchmark index and peers. It’s advisable to choose a fund that has delivered consistent returns in the long term. Equally important is to analyse the fund’s performance in the bear market.

This is because, in the bull market, even laggards tend to top the chart. However, it’s the bear market that tests the true mettle of the fund manager. Hence, before investing, do a thorough check about the fund fundamentals and opt for the one with a strong track record. 

Decide between SIP or Lump Sum

You can invest in mutual funds in two ways - a systematic investment plan (SIP) or lump sum. While SIPs instill a disciplined savings habit and help build a corpus for different life goals in a disciplined manner, lump sum investments come in handy when you receive a windfall and want to invest the same. 

However, given the current state of affairs, it’s vital to stagger your investments and avoid committing a large amount of money at one go. Also, SIPs help you accumulate more units when the markets are down and average the cost of buying with time. 

Get Your KYC Done

Once you have got a hold of the above things, the next step is to get your KYC done. When you are investing for the first time, it’s mandatory to be KYC-compliant. It’s the process of identifying you, as an investor, which can be done by applying for it with a registrar and transfer agent.  

You can also approach a mutual fund house and get it done. Most AMCs now offer an e-KYC facility that allows you to complete the process online, hassle-free. Once you are done with it, you can invest in any number of funds as per your needs. Happy investing!

The author is Head, Edelweiss Personal Wealth

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.