Mutual Funds are normally advertised by the companies in newspapers, thereby, publishing the date of the launch of the new schemes. The agents and distributors are then contacted by the investors who wish to invest in those mutual fund schemes. These agents and distributors are available throughout the country work towards furnishing the desired information about mutual funds with the provision of application forms as requested by investors.
Even banks and post-offices are actively involved in providing mutual schemes to investors through the facility of an online subscription. Investors are, therefore, required to equip themselves about the objectives of mutual fund investment which infact directly relates to their financial goals.
Cost associated with investing in mutual funds
Entry and Exit Load: There are some charges levied by mutual fund companies to float, operate and administer a find. These charges are collected from the investors as a percentage of their total investment which are known as loads.
There are two types of loads : entry load and exit load. Entry load and exit load are the charges borne by the investors to enter(purchase) the scheme and exit(redeem) the scheme. Entry load now-a-days are not pertinent on any mutual fund schemes whereas exit load varies from 0.50%-3% subject to the holding period by investors.
Fees or Fund Management: The mutual fund company levies a fee which is a small percentage of the fund's total value to manage the investments on the behalf of investors. This amount is basically the fund manager's fee for taking care of all the management procedure related to the mutual fund. The fee is chargeable as a percentage of the fund's value on an annual basis.
Expense Ratio : The percentage of total assets levied for administering a mutual fund is known as the expense ratio. As returns from bond funds are similar, expenses become a critical factor while comparing bond funds.
Transfer/exchange fee : Investors have to bear the transfer fee at the time of shifting their investment from one mutual fund scheme to another one.
Best Way to Invest in Mutual Funds in India-
Invest through SIP : Systematic Investment plans are the best options to start investing in mutual funds. Every small amount invested on a monthly basis generates the capacity of giving good returns over a specified period of time. For example : An investor putting ₹ 5000 per month through SIP in equity fund with an annualized returns of 12% can fetch ₹ 25 lakhs in 15 years.
Invest based on risk appetite: Investors consider to invest depending on their risk taking capability that would yield higher returns. For example : High-risk appetite investors aim to invest in equity funds, moderate risk appetite investors aim to invest in hybrid funds and low-risk investors prefer investing more in debt related funds.
Invest in various categories of funds : In several market scenarios, large cap, mid-cap and small-cap funds perform relatively over a specified period of time. Hence, investors would be able to gain maximum returns by investing in different categories of such funds.
Invest in sectors that are expected to outperform : High-risk funds such as sector funds are considered by those who are willing to take high risks. Such sectors have the likelihood to outperform in the near future and investors thus prefer to invest in these funds. For example : Infrastructure funds or banking funds are ideal for the investors having a short-term to medium-term horizon of 3 to 5 years.
Invest in funds based on one's financial goal: Lack of understanding about mutual funds can often mislead the investors which in turn, leads to choosing the wrong funds or failure of holding the fund for the longer tenure are some of the mishaps encountered while making mutual fund investment decisions. Investors shouldn't rely upon investing just because a mutual fund scheme has given 100% returns in one year. There exists a likelihood of erosion in the capital amount of an investor in case there is a market crash. It is, therefore, advisable to invest based on the financial goal.
Use STP for lump sum mutual fund investments : Investing the lump-sum amount in equity funds is one of the biggest mistakes an investor makes. This may possibly be a good strategy taken towards market corrections. However, when markets are booming or when an investor is unaware of the market's direction, the best strategy lies in investing a lump-sum in short-term debt funds or do STP(Systematic Transfer Plan) to equity funds over a stipulated period of time. By doing SIP to equity fund from debt fund leads to risk minimization of investing a lump sum in the mutual fund.