How to Invest in Mutual Funds - For Beginners?

Mutual funds are market intermediaries that accumulate contributions from subscribers which they deploy in the securities markets for generating returns for the subscribers. The complexities in the securities markets are beyond the understanding of the average investor who prefers to rely on the professional expertise of fund houses to earn a handsome return on his investment. But, even within the universe of the mutual fund, the investor is frequently at a loss in figuring out how he should proceed.

Critical Factors

Returns, Liquidity, Safety and Tax Savings are the four cornerstones on which the beginner must lay the foundation of his mutual funds investment structure. The weightage to be accorded to each of these criteria would differ depending upon the investor. Broadly, the ready reckoner given below would serve the purpose.

*** indicates that the criterion is very critical

** indicates that the criterion is moderately critical

* indicates that the criterion is not critical

The table is intended to serve the purpose of a general guidance for the beginner investor and is not a one-size fits all solution. Doubtless, there may be investors belonging to a defined profile who have a different perspective in terms of risk appetite or whose personal circumstances may vary from the normal profile of a salary earner, business person, and home-maker or retired person.

Asset Allocation

Armed with knowledge of the features that the selected schemes should display, the beginner’s next decision is about the asset allocation that he should plan. One often quoted, thumb rule is to invest the percentage equivalent of your age in debt funds and the balance in equity funds. That means, that a youth of 25 years should invest 25% in debt funds and 75% in equity funds while a senior citizen of 65 years should invest 65% in debt funds and 35% inequity funds. The theory is founded on the belief that at a young age, the capacity to take risks is greater whereas at an older age, stability is more important and risk taking should be reduced.

Understanding Mutual Funds

• Even after deciding on asset allocation, the beginner investor will have to select the specific scheme / plan in which to invest. This selection would depend upon his risk appetite. Choosing the growth or dividend, especially the dividend payout option would depend upon the requirement for cash and taxable income;
• There may be times when mutual fund NAVs may show a decline but that is usually temporary, and in the long run, returns from mutual funds are better than other classes such as gold, fixed/recurring deposits, etc.;
• Always ensure that you receive an account statement for your investments and redemptions;
• Examine the first statement you receive diligently to make sure that all your personal data has been correctly reflected. Otherwise, immediately approach the fund house for amendment/modification;
• In particular, register for SMS (mobile messaging) and e-mail alerts related to your investments;