16 Jul 2014

Mutual Funds Part 2/7 - How Do I Start Investing In Mutual Funds

Is mutual fund investing necessary? It is certainly not mandatory but it is one of the ways to generate inflation beating returns.I introduced mutual funds in Part 1 of the mutual fund series This article is not about how to choose a mutual fund but how to choose the medium to invest in a fund. These are the following ways to do it:

1. Bank
An individual can open an investment account (a non Demat account) with a bank. There are basic charges for the account and you can invest in different Asset Management Companies (AMCs). There are bank employees that you can seek help from. It is convenient since you already have an account with the bank but the negatives are higher expense ratios and bank employees can give misleading advise. Remember that all funds have an expense ratio which varies between 0.1% (usually debt funds) to 3% (equity funds). This is the money collected from you regardless of whether your fund is doing well or not.

2. Asset Management Company (AMC)
This is the way to directly invest with Asset Management Companies. E.g. HDFC AMC has a website hdfcfund.com. SBI, ICICI and others have their own AMCs. This is the most economical way to invest in mutual funds since an individual can invest in a direct plan. A direct plan basically means that you will not be charged a distributor's fee so you will have a lower expense ratio. The fallback is that you will have different usernames and passwords for all AMCs and you will not have all investments listed in one place.

3. Agent
Most people are familiar with this route since it has been around for a long time and provides the human interaction a lot of us desire. An individual from some AMC or bank tells you to buy a mutual fund and does all the paper work for you. This agent is getting a commission from the fund he sells. It might seem hands off and convenient but it is difficult to find an agent one can trust and who will work in your benefit rather than the benefit of his/her commission.

4. Online Portals
Online portals like fundsindia.com and fundssupermart.com are simply distributors or agents with an online presence. You can choose the fund you want, you can talk to an advisor and research about different funds. If you fill up a form online, someone will come collect all the KYC documents and make it easy for you. The fall back is that this medium does not offer direct plans which means that you pay more in terms of expense ratio. The expense ration is usually 0.5% lower for direct plans. This may seem like a low percentage but the amount lost over a long period of time (ten to fifteen years) adds up and becomes significant. The positives are the excellent interface it provides and you can see all MF investments in one place.

Which method do I choose?
The method you choose should consider costs, convenience and individual traits.  I am a person who does not like advise from agents and likes to do research about my own investments and mutual funds. Personally, I wish I had the memory and patience to invest in different AMCs so as to keep lower costs. However, I do not have that in me. I use an online portal for most funds and then have about two to three funds in my favorite AMC. It is a combination approach that suits my needs.

How do you invest in funds and why did you choose that method? Please share.

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