If you are thinking – How to invest in Mutual Funds for the first time, you will really face some tough questions. Where to invest – Equity, Debt or Hybrid? Which mutual fund scheme to choose? Is past performance any indication of the future? Which Fund House? And how to start investing? Let me help you today!

This post, in brief, will answer things to watch out while investing in mutual funds for the first time. For eg, how to know which asset class to invest, how to choose a fund house & scheme to invest when you invest for the first time.

How to Invest in Mutual Funds for the first time

Choosing Where to Invest – Equity Mutual Fund or Debt or Hybrid?

First-time investors or regular investors – they should choose a mutual fund scheme keeping Following things in mind:

Goals
Risk Appetite, and
Time Horizon.

Answering these things logically and clearly, you will get an answer about the asset class to choose.

For eg, if one is planning for Retirement, has 25 years to go & have tolerance of a moderate investor can choose a balanced fund or a large-cap fund.

Similarly, if you are planning a vacation in 3 years, you may want to invest in Debt, even if you are an aggressive risk tolerance profile.

One can opt for goals-based planning, by using websites, services of a financial planner or distributor. In fact, financial plans have a major element called goal planning. I would suggest a Comprehensive Plan to be laid out before one starts investing.

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Through a combination of goal planning & risk tolerance test, investors could work out an asset allocation plan for themselves to guide them on what percentage they could allocate across asset classes—equities, debt, and bullion.

How to know if the fund is equity, debt, hybrid or something else?

Investors can know this by some research. They can also read the scheme related documents and understands the investments objective of the mutual fund plans, and know the securities in the scheme where money will be invested. For eg, here is an objective of ICICI Pru Bluechip Fund:

Clearly, it says investing EQUITY.

How to check the Risk Involved?

SEBI has mandated fund houses to give something called Risk – O- Meter. It exactly says what sort of risk is associated with this particular fund. Here is the Riskometer for ICICI Pru Bluechip Fund & one of their debt Fund ICICI Corporate Bond Fund. One can clearly know the difference.

How to decide the Mutual Fund Company for Investment?

As an investor, one is entrusting the fund house. It is your hard-earned money. It’s important to choose one with proper research. It is like choosing a business partner. Decisions taken by them could have a significant impact on the investment performance of the scheme.

Financial planners suggested that Investor consider the pedigree (Lineage, Group, Founders) of the fund house. One also need to see what is the main business of the group or sponsor as process originates from these parent companies. Eg Franklin Templeton & Sundaram MF

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The second thing to check is the scheme’s performance. One must not look at blockbusters because “There is none in the long run”. Today’s star is tomorrows falling meteor.

A consistent ranker within a peer group is a good fund.

One also need to check the history of the fund house, there philosophy, how they make money, management quality & turnover, track changes & recovery and performance of fund managers before zeroing in on a scheme.

Is past performance the most important criteria?

Frankly, past performance is a Post Mortem. You can get clues only. Past performance of a mutual fund scheme is not an indication of future performance or returns.

One must look at 3, 5 and 10 years of the scheme they wish to invest in.

One must choose a fund that has consistently beaten their relevant benchmark during the period. A scheme that beats its relevant benchmarks consistently across time-frames indicates good fund management and efficient culture from the standpoint of house processes.

How to Invest in Mutual Funds for the first time? The Process

To start investing in a mutual fund, you need to be KYC-(Know your customer) compliant.

One way of doing this is by using physical KYC. More on KYC here.

One must also be ready to submit certain documents while investing for the first time. These depend on the category of the investor.

Here is a detailed post on this.

Investors can submit along with the first investment form to a registrar, use services of his financial advisor or mutual fund websites or distributor platforms.

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Want to know on Mutual Fund Taxation? These posts will help you: 1. MF Taxation 2019-20 2. MF Taxation in India

Download the PFD Version of MF Tax Reckoner for FY 2019-20 & AY 2020-21 post-July Budget of 2019