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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