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MF is a bridge to asset classes
Published On , 20 Jun 2016 By ET Wealth
Investing journey with MFs
Very often financial planners meet someone who intending to invest in stocks, bonds, real estate, mutual funds, gold etc. Such a statement clearly reflects that a large number of investors think that like stocks, bonds, gold and real estate, mutual funds are also an asset class which should be there in their portfolio.
MFs: Bridge to asset classes
The reality, however, is that a mutual fund itself is not an asset class. Rather it’s a bridge to investing in various asset classes like stocks, bonds, gold, real estate etc. at a cost and risk which are usually lower than when an investor invests in these assets on his own. This is possible because say if an investor invests in an Equity mutual fund, he is actually, although indirectly, investing in stocks. This is since the Equity scheme in which he is investing has a portfolio of stocks which is managed by a group of individuals who have experience in investing and managing money. Investors in Debt, gold, real estate and commodities could also expect the same. In India, though, real estate and commodity mutual funds are yet to be launched.
Low risk, low cost
Since mutual fund schemes are managed by a group of experienced investment professionals, the chances of them losing money compared to one who does not have much experience in investing in stocks, Debt etc. are lower. In addition market regulator Sebi has also put in a cap on the total expense fee that fund houses can charge their investors in each scheme (maximum of 2.75% per annum).
Better tax efficiency
Mutual funds also offer better tax efficiency when compared with direct investing. One of the reasons for this is the government's intentions to push retail investors to take the mutual fund route to investing.
How to implement
It just takes a few easy steps to start investing in a mutual fund scheme. Firstly you need to comply with Sebi's Know Your Customer (KYC) process. For this you need one recent passport photo of your, a self-attested photocopy of your Income Tax PAN card and a proof of address. Once you have these you need to fill up a single-page KYC form.
You can take the form to one of the KYC registration authorities (KRAs), or hand it over either to your investment advisor or the mutual fund agent. Once your KYC form is accepted and you get your KYC registration letter, you are ready to invest.
Alternately, Sebi has also allowed mutual fund houses to accept Aadhaar as a valid proof of identity as well as address. This has now enabled e-KYC in which case as an investor you do not need to present yourself in front of an authorised person for verification of data in your KYC form (called in-person verification). However, Sebi has clarified use of Aadhaar is voluntary and a final order on this will depend on the order of the Supreme Court.
Along with the KYC, you need a bank account to start investing. Once you have these, the next step is to select the fund that is right for your risk taking ability, the purpose for which you want to invest and your time horizon to invest. For this, the first time investors are advised to reach out to a Sebi-registered investment advisor who can guide you through the required steps and also teach you the basics.
Once you have started investing through a mutual fund, keep a watch on your investments, mainly how the fund is performing, if the fund is meeting its obligation to you as an investor. And also be careful to fulfil your duties as an investor.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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