Beginner's Guide: Want to invest in mutual funds? 5 things to tie the knot: expert advice

1- Regarding mutual funds Adil says mutual funds are a great way to invest your money as it offers the opportunity to invest in different asset classes such as debt, equity, commodities, derivatives and exchange-traded funds (ETFs). Even mutual funds give inflation-beating returns. He says set your financial goals and prioritize them critically. These may include children's education, buying a home, saving for retirement or building an emergency fund.

2- Your situation and circumstances Understand how much risk you can take. That is, analyze your risk appetite based on factors like income stability, age, financial obligations etc. If you are young then you can take more risk and get higher returns with equity funds. By youth here we mean women between 22 to 34 years of age. But if you are nearing retirement, you can choose more stable options like debt funds.

3- Mutual fund products Do research about it. Get a lot of information on different types of mutual funds available in the market. While doing so, evaluate funds on parameters like historical performance, expense ratio, expertise of the fund manager, investment philosophy and stability in returns. Aditya advises that to keep the risks related to investment away, one should choose only fund houses with a good and strong reputation and good track record.

4- How much are the costs and fees? It is not right to ignore this point. Pay attention to the total costs associated with mutual fund investing. Typically, a fund has an expense ratio, the fee charged by fund houses to manage investments ranges from 0.05% to 2.20%. If you opt for direct plans instead of regular plans, you can make significant savings in the long run. This is because the expense ratio is lower in direct plans due to the absence of distributor commission. However, if you are planning to invest directly then it is important to have complete information.

5- Tax on your final return You must understand what the implications are. Your final return from any investment will depend on the tax levied on it. Mutual funds are taxed depending on their category and investment period. For example, returns of more than Rs 1 lakh earned from equity fund investments held for more than a year will be considered long-term capital gains (LTCG). If your LTCG is up to Rs 1 lakh in a financial year, you will be exempted from paying LTCG tax but if LTCG is more than Rs 1 lakh, then 10% LTCG tax will be levied. On the other hand, short-term capital gains (STCG) in equity funds are taxed at 15%. In case of STCG, tax on debt funds is determined based on the slab rate applicable to the investor. LTCG is taxed at 20% with indexation benefits.

In the end Aditya says that as it is said do not keep all the eggs in one basket. Diversify your investments to reduce risks, balance and strengthen your portfolio. A balanced portfolio should have a mix of equity, debt and hybrid funds.

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