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After deciding between an advisor/distributor or investing directly with the mutual fund, you are ready to make your first investment. At this juncture, each of these parties provides a few options to carry your <keyword id="6362476" type="ORGANIZATION" weightage="20" keywordseo="investments">investments</keyword>, which are: 
· Paper application form &amp; cheque 
· Online investment accounts. 
 
To avail either of these options from both parties, you should follow the steps mentioned below. 
 
Option 1: Paper application form &amp; Cheque 
This is the traditional way of investing and the most common one too. For this you need to get yourself a form. If you are investing via advisor/distributor, they will provide you with a form, however, if you are investing directly via the mutual fund, you can download one from the mutual fund company’s website. 
 
Filling up the form: Please ensure that you fill the form correctly. When doing so, do pay special attention to: 
<ul>
	<li>
		Bank details</li>
	<li>
		Nominee details</li>
	<li>
		Mobile number: You will get an SMS confirmation of the transaction. The best and fastest way.</li>
	<li>
		E-mail: the mutual fund company will send you transaction confirmation as well as statements to this address. It’s best to fill it up in all caps</li>
</ul> Please also note that an "<keyword id="35471" type="ORGANIZATION" weightage="20" keywordseo="SIP">SIP</keyword>" form is different from the "one time investment" form as the former also contains an ECS Mandate allowing the <keyword id="6358378" type="CITY" weightage="20" keywordseo="AMC">AMC</keyword> to debit your bank account every month. 
 
Payment: The form needs to be accompanied by a cheque for the amount of investment made. The cheque is made out in the name of the mutual fund scheme. In case of a SIP, you need to provide a cheque for the first investment in addition to the ECS mandate. 
 
Accompanying documents: The form needs to be accompanied by a copy of your PAN Card and a copy of the KYC acknowledgement. 
 
Submitting the form: Your advisor will usually collect the form from you and submit it to the mutual fund company. If you invest directly, you need to submit the form to the nearest office of the mutual fund company or their RTA. 
 
Confirmation: You will receive a confirmation when your investment is accepted by the mutual fund company. This will come in the form of an SMS to your mobile number and an E-mail. If you have not provided an E-mail address, you will get a statement by post. 
 
Option 2: Online Investment Accounts 
Online investment options are much simpler because a lot of your paperwork goes away. You need to submit your documents only once and all investing and withdrawal instructions can be placed online. 
 
Registering: You will need to complete a registration form and sign an investment agreement to open an account. This process may be done by you visiting the office of your distributor, an RM visiting you or online. Typically when you sign up online, a paper form incorporaing your details will be sent to you and you need to sign and send it in. 
 
Investing: To invest, you have to go to the website of your preferred agent/fund website/trading platform and open an account. Once your account is opened, you will be emailed/couriered pre-filled application forms based on the data you provided during account creation. 
 
Payment: Payments can be made through the following means. 
· ECS debit: The distributor will send your investment instruction to the bank and money will be transferred to the mutual fund company. This usually takes 3-4 working days. 
· Payment gateway: After you specify your investment account, the online portal of your distributor will direct you to your bank’s net banking gateway and you will need to authorise the fund transfer. Payment gateway investments usually happen on the same day. You cannot use a payment gateway for SIP investments. 
· Direct Bank Account debit: If your distributor is also a bank, then whenever you invest through the online route, your bank account gets debited directly. 
 
How to choose between Online &amp; Offline investing 
While both methods have their pros and cons, it’s better to invest online due to onetime &amp; minimal documentations processes and ease of tracking your investments. Online distributors will also give you additional benefits like single view of investments across all <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword>, portfolio tracking, <a href="https://scripbox.com/blog/rebalancing/">portfolio rebalancing</a> and more. 
 
(About the author: This article has been contributed by <keyword id="2135489" type="UNKNOWN" weightage="20" keywordseo="Sanjiv-Singhal">Sanjiv Singhal</keyword>, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Your first Mutual Fund investment, de-jargoned

In essence, mutual fund investing is about trusting your money to a professional <keyword id="135622" type="POSITION" weightage="80" keywordseo="investment-manager">investment manager</keyword> and letting them take investment decisions for you. You take a high-level decision to invest through <keyword id="6357979" type="ORGANIZATION" weightage="80" keywordseo="mutual-funds">mutual funds</keyword> and then let the professionals take over from there. 
 
The investment manager collects a pool of money from a large number of investors and makes the day-to-day decisions to invest it in a portfolio of securities or other assets. These could be <keyword id="6354298" type="ORGANIZATION" weightage="80" keywordseo="stocks">stocks</keyword>, bonds, gold, real estate, or some other securities. Each investor in the fund gets a share of the total assets. 
 Then you only need to monitor if the <keyword id="109711" type="POSITION" weightage="80" keywordseo="Fund-manager">fund manager</keyword> is doing a good job for you. If not, fire them by taking your money out. 
<h2>
	How it works in practice is as follows:</h2>
 
 A reputed financial service company with a track record of managing <keyword id="6362476" type="ORGANIZATION" weightage="80" keywordseo="investments">investments</keyword> sets up what is called an Asset Management Company (Also referred to as an <keyword id="6358378" type="CITY" weightage="80" keywordseo="AMC">AMC</keyword>, mutual fund company, or fund house). Not everyone can set up an AMC. They have to get a license from <keyword id="35210" type="ORGANIZATION" weightage="80" keywordseo="sebi">SEBI</keyword> (the regulator that governs mutual funds in India) by demonstrating a track record and solid financial standing. 
 
After getting a license, the AMC decides what kind of mutual fund they want to offer. They can offer just one or many options. Each is called a Mutual Fund Scheme (commonly shortened to scheme, mutual fund or just fund). They will also appoint one or more named individuals to act as the fund manager for that scheme. While offering the Scheme, the AMC clearly defines the investment objective and the mode of operation of the scheme in a set of Offer Documents the format of which has been specified by the regulator. This ensures that the public investor knows exactly how their money is going to be invested. 
 
Let’s say the fund house offers two schemes: 
 
Scheme 1: invests in stocks 
 
Scheme 2 invests in bonds. 
 
As an investor, you can choose to invest in whichever one suits your purpose. Like you, thousands of investors will ‘subscribe to’ or ‘buy’ that scheme. The money so collected is the pool of money or ‘corpus’ available for the fund manager. He or she will then take the decisions about which specific stocks to invest that money in. 
 
The total corpus of the mutual fund scheme is sub-divided into units (or shares), which the investors buy. To begin with the corpus is divided into units of Rs 10. 
 
As the value of the investments made by the mutual fund changes, the value of the units changes as well. This is called the NAV (Net Asset Value) of the unit. It’s calculated by dividing the total value of the net assets of the fund by the number of units. This is published daily so you know how your money is doing. You also get periodic statements with information about your holdings. 
 
The AMC does not do all this for free. They charge a fee for managing the money. In addition there are other costs such as brokerage fees, costs of publishing statements etc. These need to be borne by the investors and are deducted from the corpus periodically. These are called Expenses of the fund and the ratio of expenses to the total money managed by the fund is called Expense Ratio. To protect investors, the regulator SEBI has specified the maximum expense ratio that can be charged. Most fund houses manage to control costs and keep the expenses below the maximum cap. 
 
That was probably a lot of new stuff to learn in one go. But now you can hold your own when your advisor throws these terms at you: 
<ul>
	<li>
		Asset Management Company (AMC, Mutual Fund Company or Fund House)</li>
	<li>
		SEBI (Securities &amp; Exchange Board of India)</li>
	<li>
		Mutual Fund Scheme (Scheme, mutual fund or fund)</li>
	<li>
		Offer Documents</li>
	<li>
		Units or shares</li>
	<li>
		NAV (Net Asset Value)</li>
	<li>
		Expenses, Expense Ratio</li>
</ul>
The next Lesson in this series will be: Why should you consider investing in mutual funds? If you would like to learn more, stay tuned! 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Investment
series part 1: What is a mutual fund?

Selecting a mutual fund is like selecting any other investment and you should follow an objective decision framework. You should start by answering the following questions. 
 
Step 1: Deciding on <keyword id="35475" type="UNKNOWN" weightage="20" keywordseo="equity-funds">Equity funds</keyword> vs. <keyword id="35474" type="COMPANY" weightage="20" keywordseo="debt-funds">Debt funds</keyword> 
This decision is essentially a decision to invest in Equities vs. Debt rather than being a mutual fund selection. The key elements in this decision are: 
· What’ your investment objective? 
Is it income or growth? If you’re looking for income, then go for debt. For growth, you could choose either equity or debt depending on your investment duration &amp; return expectation. 
· What kind of return do you want/ need? Your return could be in the form of a fixed returns or capital growth (with uncertainty). If you are looking for fixed returns, <keyword id="6357979" type="ORGANIZATION" weightage="20" keywordseo="mutual-funds">mutual funds</keyword> are completely ruled out. 
· What’s your investment duration? How fixed is this investment duration? 
Are you investing for 1 year, 5 years, 10 years or longer? Debt funds are better for shorter durations (5 years or less), Equity Funds for longer. IMPORTANT: Do not confuse investment duration with review period. Choose the asset class based on when you will need the money (investment duration) for example: 20 years. However, you should review your specific <keyword id="6362476" type="ORGANIZATION" weightage="20" keywordseo="investments">investments</keyword> within that asset class more often (Review period), say every year. 
· How much return do you expect? Does historical data justify it? 
A number of investors choose an asset class with unrealistic expectations of 20% or 30% returns. The long-term average return for debt is in the region of 9% and equity is in the region of 16%. Each of these comes with varying degrees of uncertainty or risk. 
· What are the risks? Are they in line with your objective &amp; return expectation. 
The variation of return in debt is usually small. A long-term average of 9% implies a band of 8-10%. This means that there is a high degree of certainty that you’d get returns of near the long-term average. The risk of capital loss is also very low. 
On the other hand equity returns vary in a broad range. The range narrows with holding period, but there is always a wide band. There is also a high risk of capital loss due to this. 
In a simplistic way the decision between equity &amp; debt is the decision between almost certain 9% return and an uncertain 16% return. 
· What is the tax applicable on the return you get? 
Interest is added to your income and gets taxed at whatever your tax slab is (10%, 20% or 30%). 
Debt funds held for less than a year get taxed at your tax slab; for more than a year get taxed at 20% with inflation indexation. 
Equity funds held for less than a year get taxed at 15%; for more than a year have zero income tax. 
Then there are tax saving equity funds (ELSS), which have a lock in for 3 years, but save you tax in the year in which you invest. 
(Note: This is a broad generalization of tax applicability and not tax advice.) 
Step 2: Selecting a specific mutual fund 
· Understand the capability of the <keyword id="109711" type="POSITION" weightage="20" keywordseo="Fund-manager">fund manager</keyword>, their investment process and track record 
The performance of a mutual fund is ultimately the outcome of the Fund Manager’s expertise and their investment process. The two are designed to complement each other. 
All funds are required to publish the resume of the fund manager. The fund managers also write articles and give interviews that reflect their thinking and the investment process they follow. You can also understand this by evaluating the risk reward characteristics of the mutual fund and things like portfolio churn. 
A good investment process is an indicator of repeatable performance. 
· Analyse performance over a reasonable period 
Very often investors are misled by recent (usually last 6 months or one year) performance of a fund. You need to analyse performance over at least 4-5 years. Also look for consistency of performance by comparing different period returns. Always remember that past performance may not be repeated. 
· Decision on picking a thematic or sectoral fund vs. diversified funds 
Themes and sectors limit the universe of stocks available to a fund manager. Choose these if you fully understand the economic conditions and their applicability to a specific sector. You must also carefully watch for changes in these conditions. 
· Focus on facts and data rather than brand names 
An investor must be diligent in researching and analyzing data. This also involves ignoring personal preferences, uninformed recommendations, advertising and brand names. Let the track record speak for itself. 
Step 3: Re-confirm that you understand how your specific chosen mutual fund works. 
· Read the offer documents 
· Understand investment/ redemption limitations if any 
· How can you invest? How can you withdraw? 
· Cost and load structure- A load is a percentage charged by the fund to recover distribution costs. This may be charged at entry (Entry Load), exit (Exit Load) or over the life of the investment. 
 
(The next lesson on this series will be: How do I invest in mutual funds? How much does it cost me? 
If you would like to learn more, stay tuned.) 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.)

Investor series: 3 easy steps that will help you choose the right mutual fund to invest in

“Mutual funds investments are subject to market risks, please read the offer document carefully before investing’ goes the oft-repeated statement.” 
	 
This warning that is written on all mutual fund investment documents and websites, just like they write warnings on cigarette packs, yet mutual fund investors ignore this caution primarily because people like you or me are not generally aware of the risks involved in mutual funds. This article would cover various market risks involved in mutual fund investments and also share tips on how you can reduce them. 
 

	Types of risks
The market risks are of two types. One type is of market risks are the ones that you, as an investor, can do nothing about. These are called systematic risks; these could be political factors, exchange rate fluctuations or even bad weather. Contrary to what you may have heard, these are difficult, if not impossible to predict or avoid. The second type is of risks are those that you can manage by diversification strategies. Generally, in a mutual fund, these risks are taken care of by your fund manager but you should be aware of them nonetheless. We can categorize them further into three broad types: business risk, concentration risk and liquidity risk. 
 
· Business risk: A sudden strike in the auto sector is an example of business risk. Poor financial performance of a company is another example. A fund manager mitigates this by diversifying across companies and sectors. 
 
· Concentration risk comes in when a mutual fund invests too large a proportion of its money in a single stock or sector. Sector funds, by definition, suffer from concentration risk because they invest in a single sector. 
 
· Liquidity risk arises if a fund cannot quickly convert its investments into cash, either in response to a redemption demand by investors or as part of portfolio rebalancing. Mutual funds investing in small cap stocks face this risk. 
 
 
 
What can you do about this, now that you know? 
Be careful while picking mutual funds. Ensure that you invest in large well-diversified equity funds. If you invest in specific sector or small/mid cap funds, do it with full knowledge of attendant risks. 
In our experience, mutual fund managers do a good job of managing risk. The biggest risk to an individual investor investing in mutual funds comes from faulty investment practices. And there is a lot you can do about it. 
 
Reduce risk by reducing mistakes 
Investing by definition involves exposing yourself to ‘risk’. The best you can do is: minimize risk. Having decided to invest via mutual funds, and not directly into stocks, is step 1 of minimizing risk. You are saying, “Let me entrust the task of investing to people more capable than me, and who do it fulltime”. 
 
But most investors still make lots of simple errors while investing in mutual funds. Let’s look at common errors, so can you avoid them. 
 
1. Investing with expectation of very high returns 
In an earlier section we talked about what the long-term expected returns from various asset classes are. However, we continue to see investors choose investments with expectation of unreasonable (40-50%) returns. This is just not going to happen and in an attempt to generate that return, you are likely to be misled into investing in funds that have shown a temporary blip in performance. 
Look at returns of funds over a minimum 5 year period. A 2-3% outperformance for equities and a 0.5-1% outperformance in debt funds is the best you can expect and you should be aware of that. 
 
2. Investing without understanding of underlying investments 
You already know that all mutual funds are not the same. Depending on which asset class and category of assets they invest in, you will get different returns with different behaviours. Debt funds offer lower but steadier return. Equity funds offer higher but more volatile return. 
 
Taxes saving funds (ELSS) are essentially equity funds and have the same return and risk profile. 
 
With this course, you should have enough knowledge to understand how the returns from a specific type of mutual fund will vary. 
 
3. Investing in NFOs “at par” or funds with “low” NAV 
Some investors believe lower the NAV (Net Asset Value) of a fund, the better value it provides. In other words, a fund with an NAV of Rs 20 is “cheaper” than another with an NAV of Rs 30. This belief is, perhaps, a mistaken application of the value-investing principles of equity investing. 
 
So, often such investors invest into a New Fund Offering (NFO) at par value or Rs 10, thinking they are buying value. 
 
But as you already know, from this course, that it makes no difference whether the NAV of a fund is high or low. In fact, older funds, with a longer track record, will always have high NAV and you are better off choosing those rather than a new fund with lower NAV but no track record. 
 
4. Investing for “dividends” 
We often see advertisements by mutual funds declaring dividends. Some investors are misled by these and think higher dividends reflect good performance. In the case of mutual funds, dividend declaration is nothing more than a book entry. Dividends are not interest but repayment of capital. Therefore the fund’s NAV falls to the extent the dividends are paid out to its unit holders. In fact, a growth option where you withdraw the money when YOU need it is better for you from a tax perspective. 
 
Conclusion 
Understanding market risk is important, but if you have chosen the asset class that best meets your objectives, you can trust the fund manager to manage the market risk for you. 
As an investor, you should focus on things you can control which are: Choosing the right mutual funds; following the correct process for investing; and reviewing your investments every year. 
 
(About the author: This article has been contributed by Sanjiv Singhal, CEO, <a href="http://scripbox.com/" target="_blank">scripbox.com</a>.) 
 
(Image credits: www.economictimes.com)

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