Investing in Mutual Funds for The First Time? Read On

If you're a beginner wanting to be exposed to the financial markets, one of the best ways to gain long-term benefits is to invest in mutual funds.

However, mutual funds investment may seem complicated for first-time investors. Developing a thorough understanding of how mutual funds work is the first step in your mutual fund investment journey.

Read on to know more about mutual funds, how to invest in mutual funds, and factors to keep in mind as a first-time MF investor to make the right investment decisions.

How do Mutual Funds work?

A mutual fund is essentially formed by pooling funds or investments from various individual/ institutional investors with common investment objectives. 

Managed by an Asset Management Company (AMC) and a professionally qualified fund manager, mutual funds strategically invest in various securities to generate maximum returns for their investors based on the fund's investment objectives.

When investors invest in MFs, they make money through regular dividends/interest as well as capital appreciation. They also enjoy the option to either reinvest the capital gains through a growth option or earn a regular income through a dividend option. 

Factors to Consider When Investing in Mutual Funds for the First Time

As mentioned above, mutual funds are primarily a collection of different stocks and bonds managed by qualified investment professionals. If you wish to invest in mutual funds for the first time, make sure to keep following things in mind-

• Understand and Know the Purpose of Your Investment

When you invest in mutual funds, the very purpose of the investment should be clearly defined. It could be anything from purchasing a home, child education, wedding or retirement planning, and more.

Having a purpose will allow you to filter various mutual fund options based on risk level, payment method, and lock-in period. Also, while having a goal might not be necessary at this stage, there should be clarity on the amount of wealth you wish to create and in what time frame.

• Consider the Risk Factor

As a new mutual fund investor, you need to be clear on the availability of several types of mutual funds in India based on your risk appetite.

The idea is to select a suitable scheme based on your risk-taking capacity, considering that a higher return expectation means associated risk.

• Keep Your Portfolio Diversified

As a beginner, always consider investing in more than one mutual fund to adequately diversify your portfolio and earn risk-adjusted returns. Having a diversified portfolio of funds will allow you to diversify across asset classes and different investment styles.

Apart from this, it also gives you the advantage of evening out risks as when one mutual fund underperforms, the other funds make up for the loss, thus maintaining the overall value of your portfolio. 

• Keep Your KYC Documents Updated 

To invest in a mutual fund, you need to have necessarily completed the Know Your Customer (KYC) process. KYC is a mandatory government regulation for most financial transactions in India to safeguard investors' interests and identify the source of funds or prevent money laundering. For mutual fund KYC compliance, you need a PAN card and valid address proof.

• Choose SIPs over Lump-Sum Investments 

For beginners, it is always best to invest in mutual funds via systematic investment plans (SIP) instead of lump-sum investments, especially when investing in equity instruments.

This is simply because, unlike a lump-sum investment that can put you at risk of catching a stock market peak, SIP helps you spread your investments over time and invest across different market levels. With SIPs, you also enjoy the benefit of rupee cost averaging that helps you average out the cost of your investment and get better returns over the long term.

Final Takeaway

When you invest in mutual funds for the first time, goal-based investing is key as it helps you clearly define the risks you can take. Also, goals act as the checkpoints to help you stay disciplined and on track with your mutual fund investments. However, make sure to gather complete information and research thoroughly to be able to choose the right fund before you start investing in MFs.

If you are looking to achieve your financial goals leveraging the expertise of experienced investment teams, PGIM offers a range of investment capabilities through a powerful multi-manager model. Reach out to them today to learn more about investing in mutual funds as a beginner.