Started earning? Here’s how you can begin investing in mutual funds
Updated: Jun 8, 2020
Who doesn’t want to get rich? We all do.
Especially when we start earning and start getting used to the regular bank updates that show a nice, healthy balance.
So how does one get rich?
The short answer to that is by making your money work for you.
The simple answer to that is to invest smartly. That said, what does invest smart mean?
It does not necessarily imply that you have to open a trading account and get into shares and keep track of how every share is doing and buy and sell at the right time to take home a tidy sum.
This exercise is not only tedious but also requires a lot of knowledge and research. A simple and effective answer to making smart investment choices is Mutual Funds.
What are mutual funds?
The first question I had when someone suggested that I invest in mutual funds was ‘what are mutual funds?’ I was, however, too shy of displaying my ignorance to ask anyone and sagely nodded my head, ‘Yes, mutual funds’.
Here’s the straight forward definition mutual funds – A mutual fund is a kind of investment tool where professionals (fund managers) offer to manage your money. They take varying amounts of money of several individuals, pool it into a big fund and invest this in several securities depending on the objective of the fund.
It ensures that even if you are investing ₹1000, it is spread across maybe 100 companies offering you diversity and protecting you from market volatility. This translates to mean that even if one of the companies your mutual fund is invested in does not perform well, you lose only ₹10, the rest of your money is safe.
This is better than putting all your ₹ 1,000 in one share and losing it all if the company does not perform. There is a mutual fund option for every risk profile, from extremely low risk to extremely high risk. The choice needs to be made on your own personal needs.
The principle of mutual funds is that you diversify your investment to ride out any ups and downs in the market and come out richer. If you were to try and diversify yourself, you would need a lot more money to invest and a lot more time and research to keep track of your investments.
Kinds of mutual funds
Broadly speaking mutual funds invest in equity funds, debt funds or a combination of both.
Equity funds invest in the share market and are usually prone to risk. The returns are hence in line with the risk. You can pick an equity fund if you are in your prime earning stage and willing to invest for a longer period of time.
Another type of equity fund is the tax-saving ELSS (Equity Linked Saving Scheme) which has a lock-in period of three years.
Debt funds are low return, low risk. Here your money is invested in government bonds, debentures and securities. You can look at debt funds if you are looking for steady returns.
There are many other categories and subcategories of funds. They may be open-ended meaning you can start at any time and exit at any time. They may be close-ended meaning they are offered at a specific time and have a fixed maturity date.
DIY MF investing – how to get started
While it is good to know about mutual funds and investing in general, what you really need is to understand is the purpose of your investments or in other words your goal.
An effective way to invest in mutual funds is goal-based investing – what do you want to use the money you are investing for.
Are you investing for growing your money, for a regular income, for your retirement or for saving tax – the answers to these questions will help you figure out which mutual fund best suits you.
On the Basis app, you can get fund recommendations easily. Once you log in, you answer a few questions that will help you figure out which mutual funds best suit your goals and risk appetite. The recommendations are based purely on an algorithm after about 20,000 simulations.
Being a SEBI Registered Investment Advisor (RIA)Basis does not get any commission from recommending any particular fund so you can be assured that the advice is based purely on your requirements. If you would like to know more before you get started on this journey, Basis also has 10 learning modules to learn the basics of investment.
Don’t delay your goal anymore, get started on a plan for your investments the Basis app now.