How to Invest in Mutual Funds? – Guide to Start

Mutual funds are pretty sophisticated products and for a first-time investor, becoming anxious is very common. However, you can easily start your investment journey by having a basic understanding of how mutual funds work.

This article covers the following:

  1. How do Mutual Funds work?
  2. Why should you invest in Mutual Funds?
  3. Things to consider as a first-time investor
  4. How to invest in Mutual Funds?

1. How do Mutual Funds work?

Mutual funds are investment havens which pool savings from a number of investors under a particular scheme managed by an asset management company (AMC). The pooled money is then invested in securities like equity shares, bonds according to scheme’s investment objective. The fund manager, appointed by the AMC, manages the investment portfolio as per the market movements to create wealth for investors.  The fund house charges an annual fee called expense ratio from the investors to manage their portfolio. The investors usually make money by way of regular dividends/interest and capital appreciation. They may choose to reinvest the capital gains via a growth option or earn regular income by way of dividend option.

mutual funds

2. Why should you Invest in Mutual Funds?

a. Convenience

Investing in mutual funds is very convenient. With a lot less paper-work and market-monitoring, you can get exposure to a broad-based market and investment as per your requirement. Moreover, the facility of switching between funds and portfolio rebalancing helps to keep your returns in line with expectations.

b. Low initial investment

With as low as Rs 500, you can get access to a diversified mutual fund portfolio. Moreover, you get the flexibility to invest via a lump sum or a systematic investment plan (SIP). As compared to a lump sum, an SIP is a good way to lower the overall cost of investment and enjoy the power of compounding.

c. Tax-saving

Section 80C provides tax deductions on certain financial instruments and mutual fund is one of them. Equity Linked Savings Scheme (ELSS) has become a popular tax-saving option for Indians in the last few years, owing to its higher returns and the shortest lock-in period of 3 years.

d. Professional fund management

In mutual fund investing, your money is managed by a professional fund manager who is backed by a team of researchers. He formulates the investment strategy to do the asset allocation. He gets real-time access to the financial environment and adjusts your mutual fund portfolio accordingly. They have the investment-related skills which retail investors may lack.

3. Things to consider as a first-time investor 

a. Fix an investment goal

Defining your financial goal in terms of objective, budget and tenure can go a long way. This can help you decide how much you can set aside for a mutual fund and figure out your risk appetite. Investment always works best with a purpose.

b. Choose the right fund type

It takes more than reading about different mutual fund types to decide on a suitable mutual fund category. Experts normally recommend a balanced or debt fund for first-time investors as it comes with minimal risks while giving you higher returns than, say, FD.

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c. Shortlist and choose one mutual fund

With hundreds of mutual fund schemes within each category, you need to select the one that has performed well consistently for at least 5 years. Don’t forget other factors like fund manager’s credentials, expense ratio, portfolio components and assets under management while at it.

d. Diversify your portfolio

Consider investing in more than one mutual fund (not exceeding 3). A portfolio of funds will help you diversify across instruments and investment styles. It will also even out risks – when one fund underperforms, the other makes up for it without bringing down your entire portfolio.

e. Go for SIPs instead of lump sum investments

Systematic Investment Plan (SIP) is better for beginners if investing in equity or equity-oriented funds. While a lump sum investment can put you at the risk of catching a market peak, an SIP allows you to spread your investments over time and invest at different market levels. The benefit of rupee cost averaging that comes with SIPs also helps you earn higher returns over the long-term.

If you have a big amount to invest, you can invest it entirely in a debt fund and start a systematic transfer plan (STP) to an equity fund.

f. Keep KYC documents updated

You cannot invest in a mutual fund if you are not Know Your Customer (KYC)compliant. KYC is a government regulation for most financial transactions in India. To become KYC-compliant, you need your PAN card and valid address proof. Cleartax helps you

g. Open a Net Banking Account

To invest in mutual funds, you will also need an Internet Banking Account. Mutual funds allow investments to be done through debit cards and cheques, but a Net Banking account is an easiest and safest option.

h. Seek advice from a mutual fund expert

The entire process of investing in a mutual fund detailed above can be tedious and overwhelming. First, there are thousands of mutual funds to choose from and once bought, the mutual fund’s performance has to be periodically monitored. You might need to switch from under-performing funds. Get the services of a mutual fund expert and distributor, if all this is too much for you. 

4. How to Invest in Mutual Funds?

You can invest in Mutual Funds in a paperless and hassle-free manner at ClearTax. Using the following steps, you can start your investment journey:

Step 1: Sign up for an account at

Step 2: You need to enter your details like the amount of investment and investment period

Step 3: Get your e-KYC done in less than 5 minutes

Step4: Invest in your favorite mutual fund from amongst the hand-picked mutual funds

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