How To Invest In Mutual Funds – Top 4 Steps

How To Invest in Mutual Funds

See This To Quickly Understand Mutual Funds.

You may have heard “Mutual Funds Sahi Hai”. But there are many mutual funds. “Kaunsa mutual fund sahi hai”? Which mutual fund is right for you? Here are the top 4 steps on how to invest in mutual funds.

You can either follow these steps or simply Build a Plan through Propel Money. We’ll tell you exactly how much of your money should be invested in different financial products, including selection of mutual funds. If you don’t want the full plan, but only want to know which mutual funds to invest in, we’ll tell you that here. In suggesting the mutual funds specifically for you, we consider all of the steps below.

So Here Are The Steps In Selecting “How To Invest in Mutual Funds”.

Step 1 – Allocation between Debt and Equity

You first need to decide how much you want to allocate to debt (see here why you should invest in debt) and equity. This would depend upon how much risk you are able (depending upon your circumstances) and willing to take and the time period you will stay invested – ie your risk profile. Less risk, less equity. Less time you will stay invested, less equity. For example, if you are moderately risky and investing for the long term, you may opt for 40% debt mutual funds and 60% equity mutual funds.

Step 2 – Category of Fund

Once you determine the allocation, you need to select the category of the fund. Within each of debt mutual funds and equity mutual funds, there are many categories. Examples of debt mutual fund categories are: Liquid Funds, Corporate Bond Funds, Credit Risk Funds.  Examples of equity mutual fund categories are: Large Cap Funds, Small Cap Funds, Flexi Cap Funds. The mutual fund category that you select would again depend upon your risk profile.

Step 3 – Research on individual funds

You can now select the actual mutual fund within each category of debt and/or equity mutual funds. Most people only look at returns or do basic research and rely on friends and family and suggestions by financial news.

If you are doing your own research, you should look at the following parameters (see here for detailed explanations on the parameters):

Performance Parameters:
  • Equity funds performance – Not point-to-point returns but Rolling Returns, Alpha, Up Capture Ratio, Down Capture Ratio and Up Capture to Down Capture Ratio.
  • Debt funds performance – Rolling Returns, Yield to Maturity.
  • Mutual Fund Charges for all fund typesTotal Expense Ratio
Risk Parameters:
  • Equity funds risk – Sharpe Ratio or Treynor Ratio, the Risk-o-meter
  • Debt funds risk – Modified Duration, percentage invested in government bonds and highly rated corporate bonds and the number of holdings.

One can also look at the size of the fund or the Assets Under Management (AUM). 

Step 4 – Select the fund option

All funds have the option of investing in Growth or IDCW (Income Distribution cum Capital Withdrawal) option. We suggest to always go for the Growth option. If you need regular income after a few years, then select the Systematic Withdrawal Plan (SWP).

Conclusion: How To Invest in Mutual Funds

You then need to assimilate all of that in your head and decide. This can get too much for an investor. At Propel Money, we apply algorithms to put it all together to suggest funds for you. Hence, we suggest seeking professional advice and once invested in a mutual fund, don’t change it unless it seriously under-performs.

Financial Plan banner