Your ultimate guide on how to invest in Mutual Funds

how to invest in mutual funds online
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Investing is not about getting rich overnight, it’s a powerful tool to build wealth gradually. But, before you zero in on any investment option, you must carefully evaluate its pros, cons, and the risk involved in order to make an informed decision.
Here, we have created a guide to investing in mutual funds – an investment option that has gained immense popularity in recent years. As per the Association of Mutual Funds in India (AMFI), the industry AUM (Asset Under Management) stood at Rs.39.46 lakh crore as on Feb-28, 2023. This proves that mutual funds have become a good substitute for traditional investment options such as Fixed Deposits, Gold, etc. Whether you wish to plan for your retirement, buy a house, or fund a dream project, investing in mutual funds can take you a step closer to your financial goals.

Read on to learn how to invest in mutual funds in India. But first, let’s understand how mutual funds work and why you should invest money in mutual funds.

How do mutual funds work?

A mutual fund is a type of investment vehicle that invests funds from multiple investors in a variety of assets like stocks, bonds, or money market instruments. A professional fund manager oversees a mutual fund and selects securities to buy and sell in accordance with the fund's objective and strategy. You can buy or sell units of a mutual fund at its net asset value (NAV). There are two ways you can earn from mutual funds, Income Distribution cum Capital Withdrawal (IDCW) and capital appreciation.

Capital Gains:
If you purchase a mutual fund unit and sell it at a higher price, the profit generated is considered a capital gain and will attract capital gains tax.

Income Distribution cum Capital Withdrawal (IDCW):
As a unit holder in a mutual fund, you will receive IDCW that is declared by fund houses subject to availability of distributable surplus. These IDCW will also be subject to tax. This IDCW comes out of the NAV only and hence the NAV would fall to the extent of IDCW and taxes, if any.

Why should you invest in mutual funds?

  • Diversification - Mutual funds are invested in various securities across multiple asset classes to reduce the risk, in case one asset is underperforming.
  • Professional Management - Mutual funds are managed by fund managers with expertise and experience in research and selecting the best stocks from the opportunities available to invest and seek profitable results.
  • Affordable - Mutual funds are suitable for a wide range of budgets and objectives due to their low minimum investment requirements.
  • Returns - Mutual funds offer can offer relatively higher returns over long term than other low-risk investments, depending on risk tolerance.
  • Variety - Mutual funds come in various types, including equity, debt, hybrid, and others, to meet investors' different needs and preferences.

How to invest in mutual funds from your bank account?

  • You can invest in mutual funds through your bank account using a cheque or online banking. However, you can also invest in mutual funds in cash, but the limit is up to Rs. 50,000 per year. It is important to note that third-party transactions are not permitted in mutual funds, they must be through your bank account.
  • Further, you can make joint investments in mutual funds from a joint account. You can also invest on behalf of your minor child, given the child is the sole account holder or from a joint bank account of the minor with the guardian only. Ensure to change the status on account to major after the child turns 18 years old for tax implications.

How to invest in mutual funds based on asset classes?

  • You can invest in mutual funds based on asset classes to diversify your investment portfolio and meet your financial objectives. Some of the common asset classes are equity, debt, and hybrid funds.
  • Equity funds are often considered high-risk and invest mainly in stocks to generate high returns over the long term.
  • Debt funds are relatively stable investments and invest primarily in fixed-income securities such as bonds for short-or-medium terms.
  • Hybrid funds are relatively less risky than equity funds and invest in a mix of equity and debt securities in varying proportions to provide a balanced return-to-risk ratio.
  • You can select the appropriate asset class that matches your needs and preferences, after determining your investment objective, time horizon, and risk profile.

How to invest in mutual funds for tax savings?

You can also invest in mutual funds for tax savings by investing in Equity Linked Savings Schemes (ELSS). In this scheme, at least 80% of funds are allocated to equity and equity-related instruments, along with a 3-year lock-in period. Under 80C of the Income Tax Act, the ELSS offers a tax deduction of up to Rs.1.5 lakh annually. The scheme also has the potential to offer higher returns than other tax-saving instruments over the long term, depending on market performance.

How to invest a lumpsum in mutual funds?

Investing a lumpsum is a preferred strategy for achieving long-term financial goals. It allows you to invest a large sum of money in mutual funds at once. However, ensure to consider your risk appetite, investment horizon, and funds’ performance assessment before considering large amounts for investment. Also, consider diversifying your portfolio across different asset classes to reduce your impact from market fluctuations.

How to invest in mutual fund SIPs?

  • SIP or Systematic Investment Plan is a mutual investment option where you can start investing in small amounts at regular intervals to build wealth in a chosen scheme. This can be done through SIP registration by submitting a bank Electronic Clearing Services (ECS), where you need to provide the SIP amount, the time interval, and the SIP date. The ECS can be sent to the Asset Management Companies (AMCs) via a paper form or online. You must periodically monitor your SIP performance to match your financial goals. You can also modify, pause, or stop your SIP anytime, depending on your preference.
  • Mutual funds stand out from other investment options as they offer diversification, professional management, potential for long term growth, and a host of other advantages. The next step is to choose mutual funds that meet your investment objectives and risk tolerance.

We hope you will be able to make an informed decision after reading the above information. However, before making any investment-related decisions, it is a good idea to consult a financial advisor.


How much money do I need to start investing in mutual funds?

Now that you know how to invest in mutual funds, you can start investing in mutual funds online with as little as Rs.1000 per month through SIP and gradually increase your investments over time.

Which mutual fund is best to start?

New investors can balance the risk-to-return ratio by starting with hybrid mutual funds. However, it's important to choose a mutual fund that aligns with your investment goals and risk appetite.

Can I withdraw the mutual funds anytime?

You can redeem any time from open ended mutual fund schemes. However, Equity-Linked Savings Schemes (ELSS) have a lock-in period of three years.

Are mutual funds better than FD?

It is entirely a decision based on investors' risk tolerance. Even though FDs are safer and more secure since there is some portion of insurance cover to it, mutual funds typically provide better annual returns over a longer time horizon.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.