How To Invest In Mutual Funds Like A Pro: A Beginner’s Guide


 

Mutual fund investments have gained significant popularity among individual investors due to their diverse benefits. These investment vehicles, managed by financial specialists, offer a unique opportunity for individuals to grow their wealth. 


Over the last few years, mutual fund assets under management have grown rapidly. In the second quarter of 2023, global mutual fund assets reached a record $39.2 trillion, according to the Investment Company Institute (ICI). By comparison, this represents an increase of over 10% from 2022.


In this Beginner’s Guide, we’ve explained everything you need to know about mutual funds investment plans, available options, and essential investment strategies.

Introducing options in mutual funds investment plans

Let's start with exploring different options in mutual funds investment plans: 

  1. Large-cap mutual funds

Large-cap mutual funds, often referred to as the blue-chip of India, boast a substantial market capitalisation exceeding ₹10,000 crore. According to Hemant Sood, Founder of FinDoc, these funds are considered safer due to their strong financials and high liquidity. Investors can expect an annual return ranging from 12-15%, making them an attractive option for those seeking stability in their investment portfolio.

  1. Mid-cap mutual funds

Investors looking for a balance between risk and return often turn to mid-cap mutual funds. These funds channel investments into mid-sized Indian companies known for their growth potential. Hemant Sood suggests that mid-cap funds tend to offer slightly higher returns, around 15-18%, albeit with a modest increase in risk compared to large-cap funds.


  1. Small-cap mutual funds

Small-cap mutual funds join the scene for individuals ready to take on more risk in exchange for potentially bigger profits. As Sood notes, the risk associated with small caps is compensated by an anticipated return of around 20%.

Exploring other categories

In addition to the main categories of mutual fund schemes, investors have a wide array of choices to enhance the diversification of their portfolios. Multi-cap funds, flexi-cap funds, and value funds cater to different investment strategies. Additionally, sectoral/thematic funds, dividend yield funds, focused funds, and ELSS funds for tax savings provide further avenues for a well-rounded investment approach.

Investment Strategies for Novice Investors

As we’ve understood the types of mutual fund schemes, this subsection shares knowledge about investment strategies in mutual funds investment plans for a novice investor.

  1. Start with Index Funds

Index funds serve as an excellent starting point for beginners seeking to enter the realm of mutual fund investment plans. These funds monitor market indices such as the Sensex/Nifty and provide a simple, low-risk investment alternative.

  1. Assess Risk Appetite

Once comfortable with the basics, investors can evaluate their risk appetite. Depending on their risk tolerance, they can consider diversifying into large, mid, or small-cap mutual funds.

  1. Regular Monitoring for Diversified Funds

While index funds may not require frequent reviews, diversified funds demand regular monitoring. Balwant Jain, a tax and investment expert, emphasises that if a fund's performance falls below the benchmark, corrective action is essential.

  1. SIP for Starters

Systematic Investment Plans (SIP) are highly recommended for beginners. With SIP, investors can start with as little as ₹500 a month, taking advantage of the growth potential in the Indian stock market while managing risk through consistent investments.


  1. Strategic Diversification

Experts at Margadarsi Chits advise against getting carried away and investing in numerous funds. Instead, they suggest maintaining a well-thought-out portfolio comprising 4-5 funds. This mix should include small, mid-, Flexi, and large-cap funds, with a specific emphasis on index funds for large-cap investments.

Understanding Chit Funds and Mutual Funds Investment Plans: Exploring Investment Options

Let's explore how mutual funds investment plans operate with an illustrative example. Imagine a group of 10 individuals coming together to form a chit fund. Each member contributes Rs. 1000 monthly for a period of 10 months, with one person acting as the organiser, overseeing meetings and auctions while charging organiser fees.


The group amassed Rs.10,000 in the first month. During the auction, Person A bids Rs. 9000, Person B bids Rs. 7000, and Person C bids Rs. 8000. The lowest bid, from Person B, wins, and they receive Rs. 7000. After deducting a 5% organiser charge (Rs. 500), Person B receives Rs. 6500. The remaining Rs. 3000 in profit is evenly distributed among all 10 participants, with each receiving Rs. 300. This process repeats monthly for 10 months.


Let's compare this to mutual fund investment plans. The mutual fund plans pool money from several participants to invest in stocks. When you invest in mutual funds, you receive units allocated by the Asset Management Company (AMC) of your choice. Returns on your investment are regulated by the Securities and Exchange Board of India (SEBI), providing a trustworthy and transparent investment environment, unlike the less regulated chit funds.


When deciding between Margadarsi chit funds and mutual funds, numerous aspects such as risk, returns, and regulatory control must be considered. Mutual funds provide a broader and more regulated approach to investment compared to chit funds, where a cooperative bidding process takes place within a limited group. Understanding these investment options empowers you to make informed decisions based on your financial goals and risk tolerance.


As you explore investment strategies, it's crucial to weigh the pros and cons of different options, including chit funds and mutual funds, to align your choices with your financial objectives. 

Final words

Equity mutual fund schemes offer a diverse range of investment options tailored to individual return expectations and risk appetites. Given the market's short-term volatility, these options provide avenues for long-term investments. It is important to note that the opinions stated are those of individual analysts, and investors should seek certified specialists before making any decisions about mutual funds investment plans.


As you commence on your mutual fund investment journey, consider the plethora of options available, align them with your financial goals, and adopt sound investment strategies for long-term success.

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