Wednesday 4 April 2018

How to Buy Mutual Funds – Full Guide


There are so many interested people who want to invest in mutual funds but do not know how to start. In this blog, I am going to guide you step by step. There are many questions can be raised before start investing. How to open a Mutual fund account? How to pick right mutual funds in the medium term and long term? What documents do you need to submit? What do you choose lump sum investment option or SIP?

How to open a Mutual fund account?


Frankly speaking, there is no such concept of a mutual fund account assuming if you are thinking of a bank account, Demat account or trading account. You can directly purchase mutual funds units without such accounts dedicated to MFs. When you purchase units the fund house will allow you folio numbers similar to an account number.

You can also open an account with a broker who provides online service, for an example, you can open an online account with Sharekhan. From here you can buy and sell your mutual funds yourself. You also can ask them for an advice related to the funds which will suit you. 

How to pick right mutual funds for short term and long term?


Mutual funds are always the good investment option if you wish your money to be growing over a period of time. Wide ranges of mutual funds are available to invest today. Whether you are thinking about capital gain or seeking regular income mutual funds are best options for you. Calculate your financial goal and investment period first and then decide accordingly which mutual funds are going to serve you most. There are many types of funds are available for investment namely:

    Money market funds
    Fixed income funds
    Equity funds
    Balanced funds
    Index funds
    Speciality funds
    Fund-of-funds

If you are young and want to invest in mutual funds for long-term, then invest primarily in equity growth funds rather than debt funds. But if you are a retired person, then debt funds would be a perfect choice for sustainable income. If you are thinking about investing for a short period time then ultra-short -term debt funds would be the best option for you.

Short Term & Long Term Period:


According to the tax rules if your investment holding period is for 1 year or less then it is considered as a short-term investment. And if you hold your investment for more than 1 year then it is known as long-term investment. For equity funds, capital gains generated from short-term investment are treated as short-term capital gain and taxed accordingly. Whereas, capital gains generated from long-term investment are treated as long-term capital gain and taxed accordingly. For debt funds, the holding period is treated differently. If your debt investments are sold for 3 years then it is treated as short-term capital gain and when it is sold after 3 years then it is treated as a long-term investment and taxed accordingly. Long-term investment is always best but you can also take the opportunity of the short-term investments too.

Documents you need to submit for investing in mutual funds


Buying a mutual fund today is not a daunting task. It is super easy. You could even do it online within a few minutes.

Application Form: This is the most basic requirement. If you wish to start investing in mutual funds. You may need to fill more than one application form. One for opening a mutual fund account and another one for a SIP plan if you opt this option too. If you wish for an electronic transfer from your bank account, an ECS form will also need to be filled.

KYC Compliance: KYC (Know your’s client) norms have been made compulsory for everybody who wishes to invest in a Mutual fund. You need to submit your KYC acknowledgement along with your Mutual Fund investment form. KYC compliance proves that you already have a pan that’s why you no longer need to submit your PAN details. Go to the website www.cvlindia.com and then click on “Inquiry on KYC”. A pop-up window will appear on your screen and ask you fill your PAN number. Fill it up and then submit it for verification. Once your KYC is approved you will be notified on the screen. You need to take a printout of it as a proof.

Proof of Identity: (Any of the following documents are required)


-    PAN card
-    Aadhaar Card
-    Passport
-    Voter’s ID
-    Driving licence
-    And Identity card with applicants photo issued by the approved organization

Proof of Address: (Any of the following documents are required)


-    Aadhaar card
-    Driving licence
-    Passport
-    Voter’s ID card
-    Ration card
-    Registered lease/sale agreement of residence
-    Flat maintenance bill
-    Insurance copy
-    Utility bills such as electricity bill, landline telephone bill, or gas bill, less than 3 months old
-    Bank account statement/passbook, less than 3 months old
-    Any other documents issued by the approved organization. 

  • Cheques required for lump sum amount or SIP as per your choice. Cheques are not required if you want to do investments online.
  • GST rate of 18% applicable for all financial services.

What do you choose lump sum investment option or SIP?


You want to invest Rs.10,000 in Mutual funds. You can invest Rs.10,000 in mutual funds in one shot (lump sum). Or you may want to invest Rs.1000 on a monthly basis (SIP). 

1st Month – NAV 13
2nd Month – NAV 14
3rd Month – NAV 12
4th Month – NAV 15
5th Month – NAV 17
6th Month – NAV 20
7th Month – NAV 18
8th Month – NAV 19
9th Month – NAV 21
10th Month – NAV 20

Suppose you have invested lump sum Rs.10,000 on 1st month and sold in the 10th month. Your total mutual fund's units are (10000/13 = 769 units) and your profit on 10th month is you sell is (769*20 – 769*13= Rs.5383 approx.).

For SIP your total units will be (10000/(13+14+12+15+17+20+18+19+21+20/10) = 592 units), So the profit here is (assume you selling on 10th month at NAV 20 (592*20 – 592*16.9= Rs.1480 approx.).

It is up to you to choose what you will prefer sometimes lump sum investments win and sometime SIP.

You can follow my blogs Basic Knowledge of Mutual Funds for the Beginners & Benefits of Investing in Mutual Funds to know more about mutual fund investment. 

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