How to invest in Mutual Funds? 5 Steps to invest in Mutual Funds

1. Understand your risk capacity and risk tolerance. This process of identifying the amount of risk you are capable of taking is referred to as risk profiling.

2. The next step is asset allocation. Once you identify your risk profile, you should look to divide your money between various asset classes. Ideally your asset allocation should have a mix of both equity and debt instruments so as to balance out the risks.

3. Then you should identify the funds that invest in each asset class. You can compare mutual funds based on investment objective and past performance.

4. Decide on the mutual fund schemes you will be investing in and make the application online or offline.

5. Diversification of your investments and follow-ups are important to ensure that you get the best out of your investment.

How to invest in Mutual Funds in Detail

Before you decide to invest in a mutual fund, it is important to keep the below points in mind. Doing so will help you choose the right kind of funds to invest in, and help you accumulate wealth over time.

1. Identify your purpose for investing -This is the first step towards investing in a mutual fund. You need to define your investment goals which can be - buying a house, child’s education, wedding, retirement, etc. If you do not have a specific goal, you should at least have a clarity on how much wealth you wish to accumulate and in how much time. Identifying an investment objective helps the investor zero in on the investment options based on level of risk, payment method, lock-in period, etc.

2. Fulfill the Know Your Customer (KYC) requirements -In order to invest in a mutual fund, investors need to comply with the KYC guidelines. For this, the investor needs to submit copies of Permanent Account Number (PAN) card, Proof of Residence, age proof, etc. as specified by the fund house.

3. Know about the schemes available -The mutual fund market is flooded with options. There are schemes to suit almost every need of the investor. Before investing, make sure you have done your homework by exploring the market to understand the different types of schemes available. After you have done that, align it with your investment objective, your risk appetite, your affordability and see what suits you best. Seek the help of a financial advisor if you are not sure about which scheme to invest in. In the end, it is your money. You need to ensure that it is used to fetch maximum returns.

4. Consider the risk factors -Remember that investing in mutual funds comes with a set of risks. Schemes that offer high returns is often accompanied with high risks. If you have a high appetite for risk and wish to accomplish high returns, you can invest in equity schemes. On the other hand, if you do not want to risk your investment and are okay with moderate returns, you can go for debt schemes.