Mutual Funds are perfect for beginners. They provide a safe, diversified way of investing in stocks and are managed by experts. But selecting mutual funds to invest in, is a difficult task. This is why we have come up with these 12 secret mutual fund tips for beginners.
These mutual fund tips cover the basics of mutual funds including things to know before investing in mutual funds.
Mutual Fund Tip #1: Mutual Fund is not Gambling
The first and most important tip for beginners in mutual funds is to have realistic return expectations. Mutual funds will not give you 30% return in 1 year. Neither are mutual fund returns guaranteed.
Mutual funds are not 100% safe like bank FDs and at times, you may even lose money when you invest in bad quality mutual funds.
So, when you start investing in mutual funds, invest with realistic return expectations, select fundamentally strong schemes, invest for the long-term and be prepared to make mistakes or book losses.
Mutual Fund Tip #2: Be SMART
You can become a successful mutual fund investor only if you invest as per your financial goals. Financial goals are simply your dreams with an end date.
For example: I wish to buy a Kawasaki Ninja in the future is a poor financial goal.
But, I plan to buy a Kawasaki Ninja in the next 2 years and will need Rs 23 Lakhs is the perfect example of a SMART financial goal.
Setting a financial goal helps you decide which type of mutual fund is best suited to your needs.
|Years to Goal||Type of mutual fund|
|1 month – 18 months||Liquid/money market funds|
|24 months – 36 months||Debt mutual funds|
|More than 36 months||Equity mutual funds (large-cap)|
*The above grid is considering a conservative risk profile.
Mutual Fund Tip #3: Use Riskometer to Select Suitable Schemes
Mutual funds are risky. There are no “guaranteed returns” in mutual funds. Debt mutual funds carry lower risk than equity mutual funds but there is no ‘zero risk’ mutual fund in India.
The risk of a mutual fund can be understood using a riskometer. While investing in mutual funds, you need to match your risk profile with the risk profile of the fund.
Low risk = Low returns &
High risk = high returns
Mutual Fund Tip #4: Understand all Types of Mutual Funds
There are nearly 29 types of mutual fund schemes in India. Each type has a separate investment objective and risk profile. Therefore you should learn the basics of all types of mutual funds before investing.
[Suggested Reading: 29 Different Types of Mutual Funds in India]
Mutual Fund Tip #5: Asset-Allocation is Critical
Asset allocation is dividing and investing your money in different asset classes to create a balanced portfolio.
For example: If you want to invest Rs 5,000 in mutual funds for 5 years and have a conservative risk profile, then you can follow the below asset-allocation.
|Type of mutual fund||Investment amount|
|Debt mutual fund||Rs 2,000|
|Large-cap equity mutual fund||Rs 1,500|
|Multi-cap equity mutual fund||Rs 1,000|
|Gold mutual fund||Rs 500|
**This is only a sample grid. Not investment advice.
As a mutual fund beginner, you should finalise your asset allocation strategy as per your financial goal and risk profile.
Mutual Fund Tip #6: SIP vs Lumpsum – Which is more profitable?
There are two popular methods of investing in mutual funds:
- Systematic Investment Plan (SIP): When you divide your investment amount in small parts and invest throughout the year, then it is a systematic investment plan.
- Lumpsum Investment: When you invest 100% of your investment amount at one go, it is known as lumpsum investment.
An important tip for beginners in mutual funds is that they should invest via SIPs and should not try to time the market.
An important money making tip for mutual fund beginners is to opt for RankMf’s SmartSIP option, if you want to beat regular SIP returns.
Mutual Fund Tip #7: Selecting between Growth and Dividend Option
Every mutual fund scheme has a growth and dividend option.
In the growth option, all the income generated by the scheme, like dividends, bonus, etc is reinvested back into the scheme.
In the dividend option, you get income at regular intervals. You can select to receive dividends on daily/weekly/fortnightly/monthly/quarterly or annually.
For beginners in mutual funds, it is recommended to select a growth option whereas retirees can opt for a dividend option.
Note: The dividends earned on both equity and debt mutual funds are taxed in the hands of the investors.
Mutual Fund Tip #8: Do not Over-Worry about NAV and AUM.
Another tip for beginners in mutual funds is to not worry about the NAV (Net Asset Value) & AUM (Assets Under Management) of the fund.
Beginners believe that a fund with NAV of Rs 800 is better than a fund with NAV of Rs 50. Also, a fund with more AUM does not mean that it’s better.
There are many hidden mutual fund schemes which have low AUM and NAV but have generated great returns.
So, do not overthink about NAV and AUMs as they keep increasing and decreasing as per market conditions.
Mutual Fund Tip #9: Use Power of Compounding
Albert Einstein famously said, ‘Compound interest is the 8th wonder of the world’. Let us see how compounding really works.
|Monthly Investment||Rs 5.000|
|Investment Period||240 (20 years * 12 months)|
|Future Value||Rs 38,28,485|
|Total Principal Invested||Rs 12,00,000 (5000*12*20)|
|Total Profit Earned||Rs 26,28,485|
As you can see in the above table, due to the power of compounding, your investment of Rs 12 Lakhs has grown to Rs 38.28 Lakhs i.e 3 times!
Mutual Funds are the perfect way to use the power of compounding to become rich.
Mutual Fund Tip #10: Split up your Systematic Investment Plan
The idea behind a systematic investment plan is to get better cost-averaging. In SIP, since the investment is divided into 12 months, in some months you get more units (when market and NAV is down) and other months you get less units (when market and NAV is up). So, overall, the cost per unit gets averaged out.
To increase this cost averaging further, you should split your SIP amount into weeks.
For example: If you invest Rs 20,000 on 5th of every month in Axis Bluechip Fund, then you can do a SIP of Rs 5,000 each on 5th, 15th, 21st and 28th of every month. This way you can increase your chances of buying on market lows.
Note: You can choose any dates in a month. There is no science to this.
Mutual Fund Tip #11: Learn Mutual Fund Taxation
An important tip for beginners in mutual funds is to understand mutual fund taxation.
Equity and Debt mutual funds have different taxation.
|Type of mutual fund||Holding Period||Capital Gain Tax||Tax Rate|
|Equity/Balanced Mutual Fund||Less than 12 months||Short-term||Flat 15%|
|Equity/Balanced Mutual Fund||More than 12 months||Long-term||10%* above Rs 1 Lakh|
|Debt/Gold/Liquid Mutual Funds||Less than 36 months||Short-term||As per tax slab|
|Debt/Gold/Liquid Mutual Funds||More than 36 months||Long-term||20% with indexation|
Also note that there is a separate mutual fund scheme which helps you save tax. An Equity Linked Savings Scheme helps you save upto Rs 46,800 by investing upto Rs 1.5 lakhs under section 80C of the Income Tax Act,1961.
Mutual Fund Tip #12: Keep Track
Tracking the performance of your mutual funds is very important. But you also have to give your funds time to perform.
Do not sell all your investments simply because the fund did not perform as per your expectations in 6 months. Equity mutual funds need time to grow.
Track the performance of your funds over the long-term and only make changes when the fund has been underperforming for more than 1-1.5 years.
While these 12 mutual fund tips will help you become a better investor, to truly experience the power of mutual funds, you need a mentor. A mentor that will help you discover the best mutual funds and most profitable mutual fund strategies.
RankMF is the perfect mentor for beginners in mutual funds as it helps you discover the best mutual funds in India and also provides an investment platform with unique features like SmartSIP, SmartSwitch, SmartSIP+, Mutual fund baskets and a lot more!
Open your absolutely FREE RankMF account today and start multiplying wealth with the best mutual funds in India.