Investment in mutual funds is one of the best options available to you as an investor especially if you are new to investment. It gives you a wide choice of investment. You can invest in the equity market, debt market, call money market, government securities, overseas market, and commodity market through mutual funds. There are various types, categories, and sub-categories of mutual funds available to investors. This makes investing in mutual funds for the first time, a daunting task. In the following paragraph, we will touch on some of the important considerations for investing in a mutual fund scheme for the first time.
As an investor, you can buy mutual funds directly from the fund house’s website or branches if you are KYC compliant. First, you need to be a KYC compliant for investing in a mutual fund. All the funds come with direct as well as regular versions of the same fund, so be sure to specify that you are interested in the direct version. In long run, they give better returns.
If you are thinking of buying more than one fund then you have to go to some of the companies including broker and fintech companies that will help you to buy funds of different fund houses from the same platform. It is better to choose the right platform that gives you a bouquet of products. Thus you can build a well-diversified portfolio of funds and stocks without venturing outside this platform. By investing through one platform, you can easily transfer assets from one fund to another. You’ll also consolidate paperwork, getting one statement for all of your funds instead of a separate one for each fund you own.
Making the Purchase
If you’re buying a fund on your own (without the help of a broker or planner), you need to visit the fund house or platform you have chosen. That means visiting their website, downloading the scheme information document (SID), understanding the fund, and finally investing in them. There are many options to select from each fund such as dividend, dividend re-investment, and systematic investment plan (SIP) or lump sum. The key ones are whether to reinvest dividends and other distributions and whether to invest a lump sum or a smaller amount each month.
Tracking Your Purchases
Whether you invest a lump sum or rupee-cost average or use some combination of the two, be sure to keep copies of the fund statements recording your fund purchases. These are vital for keeping track of the fund shares you own. Knowing exactly when you bought funds and how much you paid for them can be a big help while filing your tax returns. When you redeem or cash in, funds, you can minimize your taxable gains by paying attention to the fund’s NAV and how long you held them. Gains in equity funds that you have owned for at least one year are taxed at a lower rate than those you have held for less than a year. Similarly for debt funds, however, the period is three years to determine the tax rate.
Great First Funds
Most first-time fund investors want to find a fund that doesn’t require a high initial investment and is less risky. Unfortunately, one of the best “first fund” choices, for retail investors, is a balanced fund that invests in both equity and debt. In order to maintain this ratio, the fund manager will typically disinvest from holdings that have gained more and invest in holdings that have gained less. This of course is asset rebalancing. Effectively, gains that are made in equity are protected by debt. The great advantage of balanced funds is that they are inherently safer than pure equity funds. They gain well when the markets gain but when the markets fall they fall less sharply, thus protecting gains that were made in better times.
In addition to this tax saving funds or Equity-Linked Savings Schemes (ELSS) are basically all-equity funds in which investments are eligible for tax exemption under Section 80C of the Income Tax Act. Under Section 80C, you can invest up to Rs1.5 lakh in a set of instruments, one of which is ELSS funds. Since they are equity funds, you should invest in them for the long term. In the case of ELSS funds, this long-term imperative is enforced under tax laws through a three-year lock-in. As a result, investors tend to have a good experience as they receive reasonable returns from these funds. Moreover, the tax-break