A guide on how to invest in mutual funds for a beginner

·8-min read

Investments can appear intimidating, and we often get lured into schemes that do not benefit us as much as they should. This is mostly because of the lack of knowledge about them. However, this is not the case with mutual funds as they are managed by professional fund managers who have extensive knowledge about them.

If you’re a beginner, mutual funds can be the safest option to invest your money in the stock market. As opposed to investing directly in shares, these funds let you benefit from high rates of return on investment with relatively less risk. Curious to know more before investing in mutual funds? Keep scrolling.

All about mutual funds, how to invest and other details

What are mutual funds?

According to the financial services portal Groww, “A mutual fund is an investment platform that funds money from several investors and invests these funds in several financial securities like bonds, stocks, shares, money market instruments, gold, etc.” These are usually managed by a professional fund manager of an Asset Management Company (AMC).

There are various kinds of mutual funds such as income funds, money market funds, debt mutual funds and index funds. These funds are overseen by the Securities and Exchange Board of India (SEBI) in the country.

There are four ways of investing in these funds — these are through Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), Dividend Transfer Plan (DTP) and Systematic Withdrawal Plan (SWP).

Systematic Investment Plan: An SIP enables investors to invest in mutual fund schemes where they can schedule automatic deductions of payments on a regular basis, for instance, weekly, monthly, quarterly, semi-annually or annually.

Systematic Transfer Plan: An STP allows investors to instantly switch their capital from one scheme to another with no difficulty.

Dividend Transfer Plan: DTP facilitates the automatic reinvestment of dividends in a different scheme for investors who have chosen the dividend option to invest in mutual funds.

Systematic Withdrawal Plan: An SWP is an investment approach which enables investors to make regular, fixed-amount withdrawals from the investments they have made in a particular fund.

Why should you invest in mutual funds?

Investing in such funds is the perfect way to expect higher returns on investment. This is not the case with other risk-free investments such as bank fixed deposits, bonds or post office savings schemes that give around 7.5 to 8.5 per cent annual return on investment.

It gives around 10 to 15 per cent return in the long run when funds are invested meticulously with careful planning.

Although investing in such funds has its own risks, it is relatively less than investing directly in the share market. Additionally, the risks in mutual funds can be managed by choosing to invest in large-cap mutual funds (equity funds that invest in the top 100 companies of India).

Also, an SIP is usually considered the best mode of investing because it promotes disciplined investing with leverage of rupee cost averaging which leads to better monetary growth.

About SIPs, Sunil Damania, chief investment officer of MarketsMojo, said in an interview with Financial Express in 2022, “SIP works best as it takes out market volatility and investors maintain their investing momentum irrespective of market changes. With time, mutual funds deliver good returns. Hence, mutual funds must not be viewed as a product to time the market but as time in the market.”

How to create a mutual fund portfolio?

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As you start investing in mutual funds, it is important to understand that building a good mutual fund portfolio can help you in the long run to increase profits. This is so because diversification and allocation of the amount among equity, debt, index and hybrid funds give investors a better chance to achieve their investment goals early and efficiently.

Building a portfolio lets investors identify their personal investment goals by listing out an investment plan with a time frame to achieve the goals. This helps investors in selecting and diversifying the types of funds in which they want to invest, which can serve their purpose in future.

Further, it is also imperative for one to maintain investment records and constantly keep an eye on investments made by checking balances and reviewing funds to analyse the performance and growth of funds.

How to invest in mutual funds?

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Either by visiting an AMC’s office or via their web portal, you can invest in mutual funds directly, which have a lower expense ratio than regular plans. If you are a fresh investor, you must submit your KYC paperwork online or in the AMC office itself.

Investing in mutual funds requires an individual to be KYC compliant before investing in a particular fund. This requires the investor to submit the KYC form with necessary documents like Aadhaar Card, PAN card, recent passport-size photograph and sometimes a cancelled cheque with a bank authorisation form. This KYC form can be downloaded from AMC’s official website, obtained offline from their office or Registrars and Transfer Agents (RTAs).

However, if you need assistance, you can contact or visit AMFI-registered mutual fund distributors who assist investors with mutual fund transactions and offer financial advice. These distributors are prohibited from charging investors any fees because the funding organisation pays them the commission. However, in comparison to direct mutual funds purchased from AMCs, the cost of mutual fund units purchased through these distributors (regular plan) is higher.

After completing this process, AMC allots you a folio number in which you can deposit funds to invest in a particular scheme and track your investment through apps like myCAMS and KFintech.

Is investing in mutual funds safe?

In terms of governance and regulation of your money, investing in mutual funds is safe because no mutual fund company can take an investor’s money and abscond. This is so because they are governed and supervised by regulatory bodies like the SEBI and the Association of Mutual Funds in India (AMFI).

However, when we talk about fixed returns and principal protection, no investment in the stock market is 100 per cent risk free. You need to analyse the performance of the funds in the previous years to know if your investment is safe or not. You can find the related data on financial websites or portals like Moneycontrol, Value Search or ET Money.

Factors to consider before investing

Listed below are various factors which mutual fund investors must consider before investing.

  • Analysing the performance of the fund, the fund manager and the AMC you are investing in is very important because it is directly related to the performance and growth of your investment.

  • Your personal investment objective with a planning horizon, which reveals your purpose and expectation of investment and for how much time you wish to keep the fund invested, is also a crucial factor to be considered as both delay and early redemption can impact your investment portfolio.

  • Understanding the expense ratio and exit load associated with funds is also important as early exit or redemption of funds can impact your profit ratio.

  • Considering your risk appetite is also a factor which should be looked upon because a fluctuating market makes mutual funds a risky investment, and in some cases, you may lose your hard-earned money.

Tax benefits on long-term investment in mutual funds

Long-term capital gains that require a one-year holding period (minimum) are completely tax free up to INR 1 lakh. However, equity funds charge a 15 per cent tax rate, plus a 4 per cent cess on short-term capital gains. In equity funds, the tax related to long-term capital gains is 10 per cent, plus a 4 per cent cess if the gain exceeds INR 1 lakh in a fiscal year. Additionally, the dividend paid on equity mutual funds is tax free.

Mutual fund investments become tax-efficient when investors hold the money for a longer duration and this helps with both increased capital gains and tax benefits.

How can online education portals help you invest better?

The internet is a pool of knowledge which can help understand concepts if used in the correct way. You can understand how to invest in mutual funds through many authorised educational portals, like Udemy, and tutorials offered by CNBC, the National Stock Exchange and BSE. Some of their courses are paid, while some are absolutely free for you to learn.

Also, you can follow YouTube channels and Instagram handles of famous and verified ‘finfluncers’ who create content around mutual funds and their benefits. Some of India’s famous financial YouTube channels include FinnovationZ by Prasad, Finology ticker, CA Rachana Phadke Ranade and Asset Yogi. This is an absolutely free source of gaining information about the subject from experts in the field.


Parking your savings in mutual funds is one of the best ways to achieve a comparatively good rate of return on your investments. However, you must always remember that they are subject to market risks and can result in loss of money. So, it is advisable to choose wisely and take professional help before investing in any scheme.

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