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Expert Tips & Tricks for Investing in Mutual Funds

Updated on April 6, 2022 | by Olivia Reeve

Investing-in-Mutual-Funds

Not everyone is an expert in investments. Learning investing is a continuous process. However, one needs to start sometime. Mutual Funds are a great way to start the investment process. It is easy, safe, and offers diversification. But again, choosing Mutual Funds is not an easy task. Fund selection depends on personal goals and aligning them with the fund. Some thought process is required for the same. 

A few helpful tips and tricks may come in handy to help with it: 

Purpose or Goal

You can reach your goal when you find the right Mutual Funds to invest in. Therefore, begin with a purpose or a plan. The goal can be higher studies, owning a house, marriage, travel, etc. But make sure to add retirement as a continuous goal.

Begin Young

Planning your goal and investing to achieve the same gets done when you are young. Do not waste time; invest it.

Risk Tolerance

Starting young provides a better risk profile. The risk levels an investor is ready to take, i.e., the risk tolerance is higher when young and reduces as one ages. Based on that, fund selection of whether to opt for an Aggressive Fund or a Conservative gets decided upon. 

Understand Categories of Funds

In October 2017, the Securities Exchange Board of India directed the fund houses to categorize the existing and future schemes into five categories: Equity Funds, Debt Funds, Hybrid Funds, Solution-Based Funds, and more. Understanding these helps align the goal to the fund.

  • Equity Funds has 10 sub-categories. It is open-ended and invests a minimum of 65% in equity and equity-oriented schemes. The best fund under Equity is the Equity-Linked Saving Scheme or ELSS. 
  • Debt Funds have 16 sub-categories based on duration. They are open-ended and invest in Government Securities, Bonds, Treasury Bills, Commercial Papers, and Certificates of Deposits. The maturity period ranges from a day to 10 years.
  • Hybrid Funds has six sub-categories based on risk tolerance. It is open-ended and invests in more than one asset class. The categories cater to various risk appetites. 
  • Solution-oriented two sub-categories with a five-year lock-in period, appropriate for retirement Fund and Children’s Fund. 
  • Other schemes have two sub-categories. They are generally Index Funds and Fund of Funds.

Competent Management Team

A good fund manager and a team are rare commodities. You need to study the track record of the fund manager. Although it is a qualitative check, get into the habit of reading fact sheets of the fund.

Research and Invest

Once the categories and sub-categories are understood, match the goal to the above categories and start investing in the best Mutual Funds in India

Diversify

Avoid holding funds with the same fund house and invest in multi-fund-houses. Have a reduced exposure to funds that is sector heavy.

Expense Ratio

Choose a fund with a lower expense ratio. Higher ratios happen because of a higher churn rate also. Hence, check the expense and churn ratio before selecting the funds. 

Taxation

Equity and non-equity-oriented schemes get taxed differently. Short-term gains from Equity Funds get taxed at 15% flat. Long-Term Gains on Equity Fundsget taxed above Rs.1 lakh at 10% without indexation benefit. Similarly, with ELSS Funds, you efficiently save taxes compared to other investments. This is applicable under Section 80C of the Income Tax Act, 1961. They also come with a shorter lock-in period. 

Debt Funds get taxed at 20% after indexation on Long-Term Gains. Short-Term Gains of debt schemes redeemed before three years get added to the income and taxed at the slab rate. Gains from the Hybrid Fundsget taxed depending on equity exposure. If the exposure is 65% and more, it gets taxed like an Equity Fund gain, or else as Debt Fund gains. 

Conclusion

Besides selecting the best Mutual Funds that match the risk profile and goal, be disciplined and consistent. Random investment offers sub-optimal returns. 

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