A Complete Guide to Mutual Fund Investment for Youngsters


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Mutual Funds is to financial world what keto is to the health industry, especially when it comes to youngsters. Everyone wants to bring it into their lives since they offer multiple benefits – grow wealth, reduce tax obligations, generate income and promote the habit of regular savings.

So, if you are a millennial (or just new to the world of mutual funds), read on as we give you a complete rundown on mutual fund investments.

What are Mutual Funds?

Everyone these days is saying that “Mutual Funds Sahi hai”. But the question remains, what exactly are mutual funds. It is nothing but a pool of money collected from multiple investors and then invested across asset classes such as debt, equity, liquid funds, etc. Contrary to popular belief, one does not need to have a demat account to buy these funds. There are numerous other ways to invest in mutual funds such as directly through the AMC, through brokers or R&T Agents, online third-party aggregators, etc.

Mutual Funds are regulated by SEBI.

Returns from Mutual Funds

These are of two types – dividend and capital appreciation. It depends on the mutual fund plan that you opt for. For instance, in a growth plan, the profits are not distributed and are reaped back to grow the scheme. Due to this the NAV (Net Asset Value) of the scheme continuously grows and one makes a profit at the time of selling or exiting the mutual fund. A dividend plan on the other hand periodically distributes the profits depending on the performance of the fund.

Types of Mutual Funds

Young investors can start investing in a host of schemes. When one is in the initial years of their career, the risk-taking ability is higher as financial responsibilities are on the lower end and you have age on your side. It is a wise decision to invest in equity funds such as large cap mutual funds at this stage, which put the majority of their corpus in shares. These are high risk and high return investment avenues. Know more about large cap mutual funds.

However, it is important to balance the portfolio and not put all the eggs in one basket. As one grows older, the proportion of debt mutual funds (which invest in safer instruments such as govt. bonds, fixed income assets and debentures) increase in the overall portfolio.

Money Market Funds, another safe option, is apt for individuals who are on the lookout for immediate and moderate returns. In these funds, the corpus is put in liquid instruments like Treasury Bills, Commercial Papers, etc.

Hybrid or Balanced Funds strike the balance between debt and equity. The proportion of each asset category depends on the scheme’s overall objective.

There are also some mutual funds which are eligible for tax deductions as per the Income Tax Act. Tax Saving Mutual funds usually have a higher lock-in period.

Mutual funds can also be classified basis their investment objective or returns such as growth funds, income or dividend funds, liquid funds, etc.

Taxation of Mutual Funds in India

It is important to understand the tax implication on mutual fund investments. It depends on the type of mutual funds and the time of sale (i.e. before or after holding period). For instance,

  • In the case of Equity Mutual Funds, the holding period is 12 months. If an investor exits from the mutual fund scheme before the completion of this period, he/she is liable to pay Short-Term Capital Gains (STCG) Tax. The current applicable tax rate for STCG is 15%. Units sold after the 12-month lock-in period attract Long-Term Capital Gains (LTCG). LTCG of 10% (without indexation) is applicable if the sale value is more than One Lakh.
  • In the case of debt funds, the lock-in period is 36 months. Units redeemed after this period attract LTCG of 20% (after indexation). If an investor exits the scheme during the initial 36 months, the sale proceeds are added to the overall income of the investor and taxed as per the prevailing tax slabs.

Things to keep in mind while investing in Mutual Funds

  • Know your risk profile
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             Are you someone who does not want to incur any losses during the entire lifetime of your investments? If yes, then you have a low-risk appetite. In this case, it is better for you to invest in debt mutual funds. On the other hand, if you are comfortable taking risks in order to get higher returns in the future, equity investments are your best bet.

             So, before you start investing, understand your risk-taking ability.

  • Financial Goals

             Just because your best friend has invested in a particular scheme, does not mean that you should too. Everyone has a different goal when it comes to investment. You should be clear what your financial goals are in the short-term, medium-term and finally the long-term. When you know what you want to save for, you will choose the right mutual fund.

  • SIP

             Systematic Investment Plan or SIPs are a great way to buy mutual fund units. Through this route, you invest in mutual funds on a regular basis. Not only does it inculcate a sense of financial discipline, but it also gives you more flexibility.

  • Read between the lines
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             There are various charges associated with mutual funds. Some of the commonly levied charges include:

    • exit load (penalty charges for exiting the scheme during the lock-in period)
    • expense ratio (administrative expenses incurred by the Asset Management Company for managing the portfolio)
    • transaction charges (commission or expenses payable to the distributors, if the investment is done through them)
  • Understand NAV

             This is one of the most important factors while choosing a mutual fund. Net Asset Value or NAV refers to the rate at which the units are purchased or sold. Check the NAV trend of the fund in order to understand the past performance.

Now that you have a fairly good idea about mutual funds, just select the right one for you and you are good to go. Happy Investing!

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