How to Start Investing in Mutual Funds: A Comprehensive Guide

Additionally, platforms offering user-friendly online interfaces and easier access to a wide range of mutual fund schemes have contributed to this surge in investments. The Indian mutual fund industry has also experienced remarkable growth due to favourable market conditions and the rise of a young, tech-savvy investor base.

According to the Association of Mutual Funds in India (AMFI), assets under management (AUM) in the mutual fund industry have reached new heights, reflecting increased participation from both retail and institutional investors. The AUM of the Indian MF Industry has grown from Rs 10.96 trillion as on October 31, 2014, to Rs 67.26 trillion as on October 31, 2024, a more than 6-fold increase in a span of 10 years.

[Read: Best Mutual Funds to Invest Now]

This trend highlights a broader shift in how Indians approach wealth management, with mutual funds becoming essential to most investment strategies. As the mutual fund industry continues to evolve, the range of investment options and strategies available to investors has also expanded.

With the current market scenario seeing fluctuations due to global economic factors, investors are looking for ways to make informed investment decisions that may help them navigate volatility while ensuring long-term wealth creation. This makes understanding how to start investing in mutual funds even more crucial for anyone looking to participate in this investment avenue.

This article will simplify the process, explaining how to open a mutual fund account (both online and offline), complete the KYC process, select the best mutual funds, and choose the right investment strategy.

1. Opening a Mutual Fund Account

   Online Process

   [Read: Is Your Mutual Fund KYC Status Verified, Registered or Hold?]

   • Choose a Platform - Select a reliable platform such as mutual fund company websites, aggregator platforms, or mobile applications.

   • Sign up - Register on the platform by providing basic details like name, email address, and phone number.

   • Complete KYC (Know Your Customer) - KYC is mandatory when investing in mutual funds. Complete eKYC by uploading:

     PAN Card

     Aadhaar Card or another valid ID proof

     Address proof

     A selfie or photograph for identity verification

     Most platforms allow you to complete eKYC in under 24 hours.

   • Link your savings account for transactions by providing bank details and uploading a cancelled cheque or bank statement.

   • Start Investing - Once your account is active, browse mutual fund schemes, compare options, and start investing.

   Offline Process

   • Visit a Mutual Fund House or Distributor - Locate the nearest branch of a mutual fund house or approach a certified distributor.

   • Fill out Application Forms - Request a physical form to open an account and complete the KYC form with the necessary details.

   • Submit Documents:

     PAN Card

     Address proof (utility bill, passport, Aadhaar)

     Passport-size photograph

   • Make Your First Investment - After completing the paperwork, make your first investment via cheque or demand draft.

   • Receive Account Statement - Once your investment is processed, you'll receive a folio number and account statement.

2. Complete the KYC Process

   The KYC process is critical to prevent fraudulent activities and ensure compliance with regulations. Here's how you can do it:

   Online KYC

   • Use a mutual fund website or a third-party platform offering eKYC services.

   • Enter your PAN and Aadhaar details.

   • Verify identity through OTP sent to your Aadhaar-linked mobile number.

   Offline KYC

   • Download the KYC form from the fund house or distributor's website.

   • Fill in details like name, address, and PAN.

   • Submit the form along with copies of the required documents at the mutual fund branch or distributor's office.

   [Read: How to Track All Your Mutual Funds With PAN]

3. Key Points to Consider While Selecting Best Mutual Funds

   Selecting the right mutual fund is essential for aligning your investments with your financial goals and risk appetite. Follow these steps:

   Step #1 - Define Your GoalsDetermine whether your investment is aimed at short-term goals, such as purchasing a car, or long-term objectives, like planning for retirement. Clearly defining your goals is crucial, as it enables you to choose mutual funds that align with your timeline, ensuring the required funds are available as you approach your targets.

   Step #2 - Understand Your Risk Appetite

   Investors with a high-risk appetite and a long-term investment horizon may consider investing in equity mutual funds. These funds primarily invest in stocks across sectors/market caps and have the potential to deliver higher returns, albeit with greater market-linked volatility.

   For those seeking a balanced approach, hybrid funds offer a mix of equity and debt investments, striking a balance between risk and return. These funds are ideal for moderate-risk investors, as they provide growth opportunities through equity exposure while maintaining stability through debt instruments.

   On the other hand, debt funds are well-suited for risk-averse investors prioritising capital preservation and consistent income.

   Step #3 - Check Performance HistoryAnalyse a fund's historical performance over long-term 3, 5, and 10 years. This will help analyse the scheme's performance across various market phases. Consistency is key. However, do note past performance does not guarantee future returns, it merely gives you an idea about the fund's ability to survive market fluctuations.

   Step #4 - Evaluate the Asset Allocation

   A well-diversified portfolio ensures that you are not overly reliant on the performance of a single asset class, thereby reducing the overall risk. For instance, younger investors with a higher risk appetite may allocate a larger portion to equities, while conservative investors nearing retirement might prefer higher exposure to debt instruments for stability.

   Step #5 - Analyse Expense Ratio and Exit LoadThe expense ratio and exit load are critical factors to consider when selecting mutual funds, as they directly impact your overall returns. A lower expense ratio ensures that a greater portion of your returns stays with you, making the fund more cost-efficient.

   Step #6 - Evaluate the Fund Manager's ExpertiseThe expertise and track record of a fund manager play a pivotal role in determining the performance of a mutual fund. Consistency in outperforming benchmarks and delivering stable returns over the long term strongly indicates a capable fund manager. Additionally, understanding their approach to risk management provides clarity on how they navigate market volatility and protect investor wealth.

   [Read: Key Points to Consider When Reading a Scheme Information Document (SID)]

Investment Strategies to Follow While Investing in Mutual Funds

With evolving market dynamics and economic conditions, choosing the right investment strategy is critical to maximising returns and managing risks. Here are some strategies suited for the current environment:

1. Core and Satellite Portfolio Strategy

   Building a portfolio with a core and satellite approach ensures stability and growth. The core portfolio could include large-cap or flexi-cap funds for steady returns and resilience during downturns. The satellite component may consist of mid-cap, small-cap, or sectoral funds to capture high-growth opportunities. This blend balances risk and optimises performance.

2. Diversification Across Asset Classes

   Allocating investments across equity, debt, and hybrid funds is essential for balancing risk and reward. For instance, equity funds are suitable for long-term goals, while debt funds provide stability for short- to medium-term needs. Hybrid funds offer a middle ground, making them ideal for moderate-risk investors.

3. Focus on Thematic and Sectoral Opportunities

   Investors with a higher risk tolerance may explore thematic or sectoral funds aligned with emerging trends, such as infrastructure, technology, or healthcare. However, these funds require careful monitoring and should constitute only a small portion of the overall portfolio.

4. Rebalancing and Monitoring

   Regularly reviewing your mutual fund portfolio ensures it remains aligned with your financial goals and risk profile. Rebalance periodically to maintain the desired asset allocation, especially during significant market movements.

   By adopting these strategies, investors could navigate the current market environment effectively while focusing on long-term wealth creation.

Invest Lump Sum or SIP in Mutual Funds?

Deciding between a lump sum investment and a Systematic Investment Plan (SIP) depends on the prevailing market conditions, your financial situation, and investment goals.

In the current market scenario, characterised by volatility and uncertain economic conditions, SIPs are a preferred choice for most investors. This method involves investing a fixed amount at regular intervals, which helps in averaging the cost of units over time.

If you have a significant amount of surplus cash and the market undergoes a correction or is undervalued, a lump sum investment can be advantageous. Investing a lump sum during market dips allows you to buy more units at lower prices, maximising your potential for capital appreciation when the market rebounds. However, timing the market correctly is crucial, which can be challenging for most investors.

In conclusion, SIPs are generally considered a prudent choice for most investors in the current market scenario due to their ability to navigate volatility and eliminate the need for market timing. However, if you have a lump sum to invest and can identify a favourable market entry point, it could be a rewarding strategy for long-term wealth creation.

Investing in mutual funds is a step toward financial independence. Remember, investing in mutual funds involves market risks. Always read the scheme-related documents carefully before investing, and consider consulting a financial advisor for tailored advice.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.