How to Invest in Mutual Funds: A Beginner’s Step-by-Step Guide

In recent years, mutual funds have become a go-to investment option for millions of Indians. Many want to know what are mutual funds and why they are so much talked about. To begin, mutual funds offer a perfect balance of professional fund management, diversification, and ease of investing. 

Whether you’re a first-time investor or someone looking to grow your wealth passively, mutual funds can be a good starting point.

Let’s explore how to invest in mutual funds in India—step by step—in a way that’s easy to understand and practical to apply.

Why Mutual Funds Are a Popular Investment Option in India?

Mutual funds are gaining popularity in India due to their flexibility, professional management, and accessibility. They allow even small investors to participate in the financial markets without needing to study stock charts or analyze company performance. If you’re looking to start your mutual fund journey and wondering how to invest in mutual funds, the answer is simple. You can kickstart your investment with as little as ₹100 per month through a Systematic Investment Plan (SIP).

Taking guidance from a trusted share market advisor can further help you choose the right funds and stay aligned with your financial goals.

Who Should Consider Investing in Mutual Funds and Why?

If you’re someone who wants to grow your savings but doesn’t have the time or expertise to pick individual stocks, mutual funds are tailor-made for you. Salaried individuals, young professionals, retirees, or even homemakers — anyone can benefit from mutual fund investments. They cater to different risk appetites and financial goals, making them ideal for every type of investor.

What is a Mutual Fund and How Does It Work?

A mutual fund is a collective investment vehicle that pools money from multiple investors. This money is then invested in various financial instruments, such as stocks, bonds, and other assets. The fund is managed by professional fund managers who make buying and selling decisions to maximize returns. As an investor, you own units of the fund, and your returns depend on the fund’s overall performance.

Types of Mutual Funds Based on Asset Class (Equity, Debt, Hybrid)

Here’s a quick breakdown:

• Equity Mutual Funds: Invest mainly in stocks. Suitable for long-term wealth creation.
  
• Debt Mutual Funds: Invest in fixed-income instruments like bonds. Less risky than equity funds.
  
• Hybrid Mutual Funds: A mix of equity and debt instruments. Good for moderate risk-takers.

Other categories include:

Liquid Funds (for very short-term goals):
Liquid funds are ideal for parking surplus money for very short durations. They offer higher returns than savings accounts and allow easy withdrawals, making them suitable for emergency funds.

ELSS Funds:
Equity-linked savings Schemes (ELSS) are mutual funds that come with a three-year lock-in period and have the potential for high returns.

However, investors should also be aware of the tax on mutual funds. Gains from ELSS are subject to long-term capital gains (LTCG) tax if they exceed ₹1.25 lakh in a financial year, making it essential to plan accordingly.

Sector-Specific Funds:
Sector-specific funds invest only in a particular industry, like technology, healthcare, or banking. While they offer high growth potential, they are riskier and best suited for experienced investors.

How to Start Investing in Mutual Funds for Beginners?

If you’re wondering how to invest in a mutual fund for beginners, here’s a step-by-step guide.

1. Define Your Financial Goals

Start by asking yourself: What am I investing for? It could be for buying a house, funding a child’s education, planning a vacation, or building a retirement corpus. Your goal will help decide the type of mutual fund that suits you best.

2. Understand Your Risk Profile

Are you comfortable taking risks, or do you prefer playing it safe? Equity funds offer higher returns but come with volatility. Debt funds are stable but offer moderate returns. Knowing your risk appetite is crucial when choosing a fund.

3. Choose the Right Type of Mutual Fund

Once you’ve identified your goal and risk profile, select a mutual fund category:

• For high growth: Equity funds 
• For stability and income: Debt funds 
• For balance: Hybrid funds

4. Decide Between SIP and Lump Sum Investment

You can either:

• Invest via SIP (Systematic Investment Plan) – small amounts monthly 
• Go for Lump Sum – a one-time big investment.

SIPs are beginner-friendly and build investing discipline.

5. Complete KYC (Know Your Customer) Process

To invest in mutual funds in India, complying with the Know Your Customer (KYC) regulations is mandatory. You’ll need:

• PAN card 
• Address proof
• Passport-size photo

Most online platforms enable easy e-KYC verification using Aadhaar-based authentication.

6. Select a Platform to Start Investing

You can invest through:

• AMC (Asset Management Company) websites
• Online investment apps
• Banks and brokers

We will explore this in detail below as part of how to invest in mutual funds online.

How to Invest in Mutual Funds Online?

Thanks to digital platforms, investing in mutual funds has never been easier. Here’s how to invest in mutual funds online:

1. Directly Through AMC Websites or Apps

Most fund houses, such as HDFC Mutual Fund, SBI Mutual Fund, and ICICI Prudential, offer direct plans through their websites or mobile apps. You can register, complete your Know Your Customer (KYC) verification, select a fund, and begin investing.

Pros:

• Lower expense ratios
• Full control over investments

2. Via Online Investment Platforms 

Apps like Groww, Zerodha Coin, and Paytm Money are designed for ease of use. You can:

• Compare funds 
• Start SIPs or lump sums 
• Track and manage investment

Pros:

• User-friendly interface 
• Educational resources 
• One-stop solution for all funds

3. Through Banks and Brokers 

Traditional banks, such as ICICI and HDFC, offer services through ICICI Direct and HDFC Securities. Additionally, many brokers also provide mutual fund investment services. If you prefer personalized guidance, this could be a good option.

Pros:

• Expert assistance
• Access to other financial products

Benefits of Online Investing: Convenience, Lower Fees, Tracking

The biggest advantages of online investing are:

• 24/7 Access: Online investing enables you to manage and monitor your investments at any time, from anywhere, providing complete flexibility and control over your portfolio.
• Lower Costs (Especially with Direct Plans): Direct plans eliminate distributor commissions, resulting in lower overall costs and higher returns over time compared to regular mutual fund plans.
• Easy Portfolio Tracking: Digital platforms provide real-time tracking of your mutual fund investments, enabling you to review performance and make informed decisions with ease.
• Seamless Transactions: With just a few clicks, you can buy, sell, or switch mutual funds instantly, making investing quick, efficient, and hassle-free.

How to Choose the Right Mutual Fund Scheme?

Now that you understand how to invest in mutual funds, the next crucial step in your investment journey is selecting the right mutual fund. Here are the key factors to consider:

• Past Performance: Look at 3-year and 5-year returns to understand consistency.
  
• Fund Manager: Experienced managers usually bring stability and better decision-making.
  
• Expense Ratio: Lower is better. This is the fee charged for managing your investment.
  

Understand Fund Ratings and Benchmarks

Understanding fund ratings and benchmarks is essential when investing in mutual funds in India. Fund ratings, provided by agencies like CRISIL or Morningstar, reflect past performance and risk levels. Benchmarks help compare a fund’s returns with market indices, such as the Nifty or Sensex, offering insights into how well the fund is managed.

Use Fund Comparison Tools or Screens on Investment Platforms

Use online tools to compare two or more mutual funds. Filters like risk level, return, fund size, and category make decision-making easier.

Best Practices for First-Time Mutual Fund Investors

Here are a few golden rules on how to invest in mutual funds:

• Start with Small Amounts and Diversify: Begin with a Systematic Investment Plan (SIP) of ₹500 or ₹1,000. Select funds across various categories to diversify your risk.
• Invest for Long-Term, Not Short-Term Returns: Mutual funds are not a get-rich-quick scheme. Stick around for 5-10 years to truly reap the benefits of compounding.
• Monitor Fund Performance Regularly: Check your portfolio at least every 6 months. Ensure your funds align with your goals and are delivering the expected returns.

Common Mistakes to Avoid While Investing in Mutual Funds

Even seasoned investors make mistakes. Here are a few to watch out for:

• Chasing Returns Without Assessing Risk: Don’t blindly invest in high-return funds. High returns often come with high risk.

• Not Reviewing Portfolio Annually: Your goals and life situations change. So should your investment strategy.

• Ignoring Exit Loads and Lock-In Periods: Some funds impose penalties for early withdrawals (exit loads). ELSS (Equity Linked Saving Scheme) funds have a 3-year lock-in period

Conclusion

With the proper knowledge and tools, anyone can learn how to invest in mutual funds. They provide a professional, diversified, and flexible approach to growing your wealth, even for beginners. Start small, stay consistent, and make informed decisions. Use tools like a SIP calculator to plan more effectively and explore trusted platforms, such as AMC websites, for deeper insights.

FAQs on How to Invest in Mutual Funds

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.