Mutual Funds Sahi Hai.
That’s the popular slogan these days. On TV, newspaper, billboards – everywhere!
The mutual fund industry is doing a great job creating awareness. As someone who has worked in the mutual fund industry, it’s heartening to see the uptick in adoption.
If you are wondering how to invest in mutual funds in India, here’s your complete step-by-step guide.
Your Step-by-Step Guide To Investing in Mutual Funds
Step #1: Get Your KYC Done
To invest in a mutual fund, you need to complete your KYC (Know Your Customer) process. Only KYC registered customers are allowed to invest in mutual funds.
Click here to check your KYC status. Enter your PAN number and CAPTCHA to fetch your KYC details.
If you see your KYC Status contains “KYC Registered”, you are good to invest.
If your KYC status says “KYC Not Registered”, “KYC On Hold”, “KYC Rejected”, or “Not Available” you need to re-initiate the process to complete your KYC.
You can see the complete list of KYC status here.
How to Complete Your KYC?
Usually, you will have to fill up a CKYC form (PDF Link) and submit it to any of the KRA (CAMS, KARVY) or fund house offices.
Open a free account with any of the online mutual fund distributors like Scripbox, Groww, Paytm Money, Kuvera, etc.
If you are not KYC registered, these distributors make it easy to complete all the formalities online.
Once you complete your KYC through any of these providers, it is valid across all providers. There is no need to do a separate KYC every time you want to invest with a new fund house or distributor.
If you are already KYC registered, you can get started with investing in mutual funds.
Step #2: Identify Your Ideal Asset Allocation
Once you submit your documents for KYC, it will take a few days to complete. You can use this time to arrive at your optimal asset allocation.
Now, asset allocation can sound complicated. However, it’s not.
Let me explain. The following table highlights the major asset classes.
|Asset Class||Risk Level||Majority Underlying Investments|
|Equity||High||Stocks/shares of listed companies.|
|Fixed Income /Debt||Medium||Company/Government bonds|
|Money Market Instruments||Low||Ultra-Short-Term bonds, cash, & cash equivalents.|
In general, higher risks come with more uncertainty and potentially higher returns. Lower risk often comes with less uncertainty and lower returns.
How are Mutual Funds Mapped to Asset Classes?
The simplest mapping is as follows:
- Equity – Equity Mutual Funds
- Fixed Income – Debt Mutual Funds
- Money Market – Liquid Mutual Funds
There are more flavours out there. But let’s keep things simple and build an asset allocation based on the above information.
How to Calculate Asset Allocation?
If you have Rs 100, how would you distribute it among the various asset classes? That’s asset allocation for you.
The rule of thumb is, for equity, asset allocation should be 110 – Your age. E.g., if you are 30 years old, your asset allocation should be 110-30 = 80%.
The remaining can be split into Fixed Income and Cash.
Now, these are only general guidelines. Your allocation can vary based on:
- How much risk are you willing to take?
- What returns are required to meet your goals?
Why Should You Ignore Risk Profiling?
Most platforms offer risk profiling. In my experience, they are pointless. The way you behave during a market crash and the way you “think” you will act will be very different.
Focus on the risk you need to take to achieve your goals.
If you can only save 10,000 every month and need to reach Rs 30 lakhs in the next 10 years, that means you need to have an annual return of more than 15%.
There is no safe investment option that gives you a 15% guaranteed return. FDs are at best 7% before tax. In this case, your goal requires that you take a higher risk and invest a majority of it in higher-risk equity mutual funds.
Note: Review your asset allocation every year. Depending on market conditions, your financial situation, and goals, adjust your allocation if required. This is usually known as rebalancing.
Step #3:Identify Mutual Funds to Invest in
Before the recategorization exercise by SEBI, there used to be 8,000+ schemes. No wonder why most people never invested in mutual funds.
How is anyone supposed to pick a few from over 8,000 options?
Even today, there are 1,000s of schemes available which confuses most retail investors.
So without going into the tedious and complicated details, let me go straight into some recommendations.
|Allocation||Recommendation||My Personal Investment|
|50%||Low-Cost NIFTY 50 Index Fund||UTI Nifty Index Fund (Growth)|
|25%||Low-Cost NIFTY Next 50 Index Fund||ICICI Prudential Nifty Next 50 Index Fund (Growth)|
|25%||Actively Managed Diversified Equity Mutual Fund||PPFAS Mutual Fund|
Note: Do not invest in 10s of equity mutual funds for diversification. Mutual funds, by definition, are diversified. You don’t need to hold more than 2-3 mutual funds. Most of the top mutual funds have substantial overlap of underlying assets, anyways.
For Fixed Income:
I am not a big fan of investing in debt mutual funds. If you take into account your overall assets – real estate, gold, etc. your share of non-equity assets might be very high.
I max out my EPF, PPF, etc. for my debt component in addition to bank deposits.
However, if you want to invest in debt mutual funds, try investing in GILT funds, which give you better return and invest in government securities.
Note: Do not fall for online distributors’ claims that debt funds are better than bank FDs. Sure, debt funds have some advantages. But you are comparing a guaranteed product (Bank FD) vs. a non-guaranteed product (Debt fund). Invest in a debt fund only after knowing all the pros and cons.
For Money Market / Liquid:
Invest in any of the top-performing liquid funds. I invest in Parag Parikh Liquid Fund (Growth) and Quantum Liquid Fund (Growth).
While most online distributors claim that they are better than your bank’s savings account, they are not risk-free. There is risk and volatility for this segment of funds as well.
Word of caution: While I have given some fund names in the guide, please note that this might not be the best option for you. Consider hiring a fee-only financial advisor to help you with your asset allocation and product selection.
Step #4: Invest Your Money
Now that we have nailed your asset allocation and product selection, it’s time to invest your hard-earned money.
There are several ways to do this. However, I’ll cut to the chase and list out the two easiest options.
- Open an account with MF Utilities and invest through them
- Choose any of the direct mutual fund distributors online
Option#1: MF Utility
My preferred option is MF Utility – a platform developed by all the fund houses. That’s as authentic as it can get.
And it’s free!
You can open an account online if you are KYC registered (Step #1).
Once CAN (Common Account Number) has been allocated to you, you can start investing.
If you have existing investments, MF Utility will populate it for you; no other platform has this capability. This becomes a truly one platform to track all your investments!
However, MF Utility is not very user-friendly. For beginners, it can be quite complicated to use.
Option #2: Use any online distributor
Dozens of online mutual fund investment platforms claim to be robo advisors, provide AI-based fund selection, and so on.
While claims can be questionable, there is no question about the ease-of-use they bring to the table.
Most of the online distributors are free to use, offer direct mutual funds, and are beginner-friendly.
Some even let you upload your statement and track all your investments in one place (manual effort needed every time).
Step #5: Track and Review Your Investments
Great job with your first investment! Now it’s time to ensure that you keep investing to grow your wealth.
SIP (Systematic Investment Plan) is an easy way to ensure that you invest regularly. However, do not blindly do a SIP just because others tell you to.
SIP is just a tool to automate your investments. Even a bank RD is a SIP. Make sure you set up a SIP after understanding all the pros and cons of giving someone the power to transfer money automatically from your bank account, every month.
I don’t have SIPs. Instead, on the day I get my salary, I log in to MF Utility and make my investments. This manual control gives me the ability to change my allocation depending on how markets are behaving.
It depends on your personal preferences – complete control over your investments, or “I don’t want to be bothered”?
FAQs on Mutual Fund Investments in India
Should I invest in direct mutual funds or regular mutual funds?
If you have the choice, choose direct mutual funds. Objectively, they are better because they give you higher returns due to a lack of commissions. However, it also depends on how you invest.
If you are just getting started, go with a distributor who sells regular or direct mutual funds, but provides a lot of hand-holding.
You can always switch to direct funds later.
Should I invest in ELSS mutual funds?
Maybe. I have written about ELSS funds in detail here.
Can I invest offline?
Yes. Most mutual funds still offer the option to invest offline. However, to keep things transparent and straightforward, I suggest that you invest online.
Should I invest in thematic funds?
Good question. However, I cannot answer that as your investment needs are currently known to you only. I am a big believer of keeping things simple. Index funds plus one or two active funds should be enough.
You generally don’t need to go mid-cap, small-cap, thematic, etc. However, if you still feel the need, consult a financial advisor before investing in funds.
Do I need a PAN card to invest in mutual funds?
Yes, if you are an adult. However, if you are a minor, guardians can open an account on your behalf. The guardian still needs to complete KYC and provide a PAN number.
Can you review my portfolio?
Sorry, no. I am not a financial advisor. All my knowledge comes from personal investing I have done over the last 10 years. As a product manager, I have also built investment products for India and the US. But that does not qualify me to dish out financial advice.
Please consult a financial planner who is qualified and can help you out.
There are so many funds to choose from. I am confused. Can you help?
I understand this confusion. That’s why I gave some recommendations in the article. However, beyond that, I cannot give you additional advice. I know it’s going to sound repetitive, but please consult a qualified planner.
Do I need a DEMAT account to invest in mutual funds?
No. You don’t need a DEMAT account. However, you need to complete the KYC formalities.
Some online providers, like Zerodha Coin, will ask for a DEMAT account. This is because Zerodha is primarily a stockbroker. They store your MF units in DEMAT format.
However, most online distributors will not ask for a DEMAT account.