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Start Making Your Investment in Mutual Funds (SIP)

Updated on: 29 Jan, 2024 03:43 PM

In India, the investing mindset is still at its nascent stage and they have yet to make the same advancements as other countries have in the investing arena. For example, the United Kingdom allows its residents to have access to the best investment apps uk to invest their money, and therefore being able to make a profit. But as India is still on the backfoot in this sense, it may be a long time until they see something like this themselves. People save in the mud-made “gullak” and then in their saving accounts and lately in fixed deposit schemes of banks. The investment in the stock market and financial market as a whole is very limited and if compared to developed economies the retail investment is also too low. This is because of the fear of losing the hard-earned money as the risk is considered to be too high. However, with mutual funds, this fear can be put aside and retail investors can invest in stocks and derivatives by using the expertise of the fund manager, be they one trained by a LeadJig seminar or through experience in the industry. In this article, you can read about the basics of mutual funds its features, benefits, types and other information which are relevant to your search.

What is a mutual fund?

In simple words, a mutual fund can be described as a collection of funds or investments from many retail investors and even HNIs and institutes and then the cumulative investment is invested in shares, bonds and other financial assets of various companies. This can be compared to an insurance policy for its approach as both collect money from several investors and customers and put them together into investment.

The person who manages the whole fund or the team is known as the fund manager and he or the team has a great role to play in the success of the mutual fund. They try to achieve the best possible return and often the highest returns for the cumulative investment in which your contributions make a sub part.

The most important thing about mutual fund is that you get to invest in the stock market even if you do not have the required sum (individually) to enter the market. Another factor which is crucial here is you as an investor do not have to worry about the market every day or you do not need to track and invest when the time is right. The fund manager is the person who does it for you. This helps retail investors and people who are not aware of the market to invest and earn from the market using mutual funds.

Features of a mutual fund

  • Pooled investment: Mutual fund is a pooled investment where thousands of people’s money are invested in stocks, bonds and derivatives instruments.
  • Small investment: You need not worry about a lump sum investment or huge investment as a mutual fund investment can be started with even Rs. 500 at present in the country. This ensures that even the smallest investors get the chance to participate in the market.
  • Expertise counts: Fund managers are professionally trained to invest in the market, they have required financial knowledge, the experience of the market and most importantly the eye for the right investment to reap great profits for the clients.
  • SEBI Regulation: The retail investors are similar in one thing if not all and that is they want their money and investment to be protected. This is why SEBI has been regulating all the mutual funds in India and this ensures the safety of your investment.
  • High returns: General people do not much think of investing in the stock market as the market is risky even if it generates high return than traditional financial instruments like Bank FDs or savings accounts. Mutual funds help this investor to earn a higher return from conventional investments without taking that much risk.
  • Great exposure: Retail investor due to lack of capital cannot get access to invest in portfolios which are huge and earning good return regularly. This drawback is also addressed by the mutual fund and due to the pooled investment strategy, all the investments (accumulation of small investment) can be invested into large portfolios.

Types of Mutual Funds

The types of mutual funds are decided according to three aspects

  • Asset Class
  • Structure of fund
  • Objectives of the investor

Under these three categories, there are different types of mutual funds which are discussed below.

According to Asset Class

  • Debt Funds: These are a safe investment as the fund is invested in financial assets like government bonds, debentures issued by the companies and other fixed-income instruments. They bear a fixed return on a periodic basis and thus are considered to be the safest mutual fund investment.
  • Equity fund: These are considered to be high risk and high return funds as the underlying assets are stocks and shares of various companies.
  • Hybrid funds: When a fund is invested into both equity and debt asset class then they are called hybrid funds. This is to strike a balance between risk and return of two asset classes and provide a good amount of return without much risk.
  • Money market funds: If a mutual fund is invested in financial assets like T-bills, CPs and similar instrument then they are called money market fund. These are other safe options for the investors as these funds provide a moderate rate of return but you get the returns within a short span of time.
  • Sector-based funds: If a mutual fund is invested into stocks of a particular sector then the fund can be referred to as sector fund. For example, the mutual fund you invest into further invests the accumulated funds in stocks of real estate companies only. In this case, the fund is a sector fund and the sector is real estate.

The performance of this type of fund is based on the performance of the sector the fund is invested in.

  • Tax-saving funds: Mutual funds can also be used for saving taxes however only equity-based schemes are considered for the same. So, the risk is higher in case of this category of mutual funds.
  • Indexed funds: The funds which are invested into certain indexes like Nifty, S&P 500, etc. are known as indexed funds.

According to the Structure of funds

  • Open Ended funds: Mutual funds are known as open-ended as buying and selling in these funds takes place throughout the year. The value at which the units of these funds are purchased and redeemed is the Net asset value or NAV. The most important aspect of these funds is liquidity quotient.
  • Close Ended Funds: In these type of funds the units are purchased at the initial time of opening the fund only and then they can be redeemed only after a specific period of time which is the maturity period of these funds. However, the liquidity of these funds is addressed by enlisting them on the stock exchange.

According to the Objectives of the Investors

  • Liquid funds: If the investor is investing in mutual funds with the purpose of using the fund anytime they want, in that case, the liquidity of the fund has to be higher. These funds thus invest in financial instruments like T-bills or CPs which have very short maturity.
  • Growth Funds: Mutual funds are mostly opted by retail and small investors who cannot invest in the financial market directly for various reasons and mostly the investors want is to see their investment grow. These funds are thus mainly equity-based funds with higher returns and long maturity period so that the fund can grow to the desired level.
  • Income funds: These are for investors who want regular income from mutual fund investment. Debentures, government bonds, and fixed income instruments are some of the underlying for these types of funds.

Why one should invest in mutual funds?

  • Diversification of investment:
    The first thing that comes up in mind with a mutual fund is diversification. When you read about the benefits of investing in mutual funds and how to invest, the diversification word comes across many times. You must have heard that the basic rule of investment is not to put all the eggs in one basket however, doing the permutation and combination is not everyone’s cup of tea. However, with a mutual fund, you get to diversify your investment without paying the hefty fee to the personal wealth manager or the financial planner.
  • Safe and recognized:
    All the mutual fund houses in the country are registered under SEBI. The board regulates the functioning of these MF houses and checks that everything is according to the investor’s best interest.
  • SIP investments:
    With SIP investments in mutual funds, it has become easier to invest as you do not require a lump sum of money to start your investment. You can start with any amount from Rs. 500 and keeps in investing on a regular interval and enjoy the benefit of cumulative interest being into play.
  • Expenses are low:
    If you go to a financial planner or a wealth manager you have to pay hefty fees. If you start investing yourself without much knowledge about the market you are putting your hard earned money into the burning charcoal. So, if you are rational enough to avoid both the situations then, mutual fund is the right option for you. As, under this option you pay nominal fees on your profits to the mutual fund house. The maximum percentage of charges a mutual fund house can levy upon you is 2.5% (according to SEBI Regulations). This amount is deducted from the investment you make.
  • Different lock-in-term or maturity period:
    If you are looking for short term investment there are liquid funds or the money market funds. If you are looking for growth there are equity-based funds. The maturity of all these funds varies from each other depending on the type of fund you invest in.
  • Goal oriented:
    The fund manager first understands your requirement for the mutual fund invests. Then accordingly he or she puts your investment in such funds which replicate your investment objective. They also switch between funds if one is doing better than others or if your objective changes.
  • Liquidity of investment:
    If you are worried about investments of yours being locked out, you need not worry as you can redeem them anytime you want without providing any justification to the MF house.
  • Tax benefit:
    You can also get a tax benefit for investing in mutual funds. If you invest in ELSS you can get a deduction up to Rs. 1.5 lakh in your taxable income under section 80 C.
  • Easy to monitor and trade:
    Mutual funds are very easy to monitor as you get to know the NAV of the fund on a daily basis from the MF house or on the trading platforms. You can trade them easily as well as nowadays many stock brokers provide mutual fund as a product.

Things one should consider before investing in Mutual Funds

The primary factors that you have to keep in mind before investing in mutual funds are

  • Expected returns: You must be expecting a certain amount of return on a periodic basis and according to that you have to check which fund is providing close to your desired return rate in last 3-5 years’ time.
  • Market condition: Before investing you need to see what the market condition is at present. If you are unaware of this then you must consult any professional who can guide you whether the time is right or you should wait.
  • Duration of investment: You must invest in funds according to the time period for which you can lock them up.
  • Fund’s availability: Finally you have to check if the kind of fund you want is available for investment or not.

However, in reality, the scenario is like you can invest when you have the money you want to invest.

Who should invest in mutual funds?

A mutual fund is for all. There are different types of funds as you have read above and thus anyone who wants to invest money for a certain purpose can find a reason to invest in a mutual fund. However, it is best for the retail investors as they get to invest their money into large portfolios and earn a comparatively higher return than traditional investments.

First-time Mutual funds investor’s checklist

A new investor when enters the mutual fund arena needs to keep in mind a few things. Some of which have been described below

  • Set a goal:
    The first thing for any investor whether a newbie or a pro is to set a goal for their investment. It is crucial to define certain financial and investing goals and making investments according to that goal so that you can achieve it by the end. It helps in assessing the risk-taking ability and to figure out the amount you want at the maturity. This, in turn, helps in analyzing and planning the investments.
  • Choosing the funds:
    Once your goal is set, you need to channelize the investment in those funds. The selection shall suit your risk appetite and investment goal. Mostly for the new investor, it is advisable to invest in debt funds and hybrid ones. As these can reap higher returns than conventional investments but with minimal risk involved.
  • Selecting one mutual fund out of all:
    Once you decide the type of fund you want to invest in. You will find that there are hundreds of mutual funds under the category you have chosen. Now your job is to find out which one of them has outperformed in the recent years. Mainly, in last 5 years on the basis of its returns, components of the fund (portfolio), expenses involved and the efficiency of the fund manager.
  • Diversification is the key:
    Once you get to understand the mutual funds a little try to diversify your investment across a few funds. But, without exceeding 3 funds at a time. This will mitigate your risk involved in each of the funds and help in earning a higher return.
  • SIPs are best for new mutual fund investors:
    You are new and do not have the understanding of this huge market and thus investing a lump sum amount may put you in trouble. SIPs are best for new investors as you have to invest a small amount periodically and if anything goes wrong you can withdraw the amount without suffering much loss. Though this approach might not get you a huge peak in the market in the beginning but with time and the benefit of rupee cost averaging and cumulative interest you are going to reap higher returns in the long term.
  • Check your KYC documents and make them handy:
    When applying for a mutual fund, you need to provide all KYC documents like PAN, AADHAAR, Address proof, etc. So, make sure you have them all and keep them ready for submission.
  • Net-banking account is a great help:
    For mutual fund investment, the easiest process would be using the net-banking service. This is not only the easiest option but also the safest. The other options can be investments made using debit cards or cheques.
  • Get expert advice:
    Try to consult any mutual fund expert whom you know or your colleague has invested through. Since it is your first time, it is better to understand the whole thing from an expert. As they are pro in the market.

How to invest in mutual funds?

You can invest in three different ways

  • Via Agents:
    Mutual fund houses have their agents like LIC agents etc. The agents can let you know about the mutual funds they are selling. You can understand the features and benefits and risks involved and then accordingly invest.
  • Direct Investment:
    Nowadays, Mutual fund houses provide direct investment scheme. Here, the investors can directly choose the scheme suitable for themselves and the funds. And then, invest in them contacting the mutual fund house. This helps in saving brokerage but for this, the investor needs to be aware of the market. Also, shall have know how to analyze it.
  • Online via fund houses:
    You can make an application to the mutual fund house directly where you want to invest. Then discuss your financial aspirations and investment objective and then accordingly they will invest your money.


Mutual funds are pooled investments which are regulated by SEBI. They are safe and secure for all investors. These funds especially attract retail investors. Especially those who want to invest in the financial market but do not have enough fund or infrastructure. These funds can be segregated amongst various types. It is based on the investment objectives, asset classes in which the fund is investing its money and also according to the structure of the fund. There is no particular best time to invest in a mutual fund, you can start the investment “any time”.
The process of investing in a mutual fund is easy. You can make an investment in mutual funds either through an agent or directly. Even you can choose direct mutual fund schemes. They are managed professionally by experts in finance and investments. You do not need to pay hefty fees to the wealth managers and financial planners to invest your money. Rather, you can just put it into a mutual fund and the fund manager will fetch you the best returns.

Frequently Asked Questions

Q- What is SIP investment?

SIP investment stands for systematic investment plan which is a part of the mutual fund. In this scheme, your bank account is debited on a periodic basis with the amount chosen to be invested. And, the investment is done automatically through ECS next time onwards. You get the benefit of rupee cost averaging and the money is invested in the market at different price levels.

Q- How you can redeem your Mutual fund investment?

You can redeem your investment by contacting the mutual fund house in which you have invested your money. They take around 2-3 days to clear your money and you get the money in your bank account. For ELSS, the money can only be redeemed after 3 years of the lock-in period.

Q- How to choose a mutual fund scheme?

If you are not choosing a direct scheme then you do not need to choose a scheme by yourself. You just need to tell your investment objective to the fund manager and they will take care of your investment.

Q- Is the tax assessing period same for mutual funds as in Income Tax?

Yes, the tax assessing period is the same. If you have invested in mutual fund starting from 5th July 2018, then you can get a tax benefit in the assessment year of 2019-20 as for the financial year 2018-19. Each financial year starts from 1st April and ends on next year’s 31st March and the Assessment year is the period from 1st April to 31st March which comes right after the financial year.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.