Mutual Funds Investment Guide – Step by Step

Investment is a very important part of anyone’s financial life. Embarking on this journey comes with many options. One of the options that you may like is Mutual Funds which stands out as a versatile and accessible choice.

Investing in mutual funds is not just about putting your money into the market, it’s about aligning your financial aspirations with a tailored investment strategy.

In this guide, we will discuss the Mutual Funds Investment Guide, Types of Mutual Funds, Steps to get started, and much more.

Before that, let’s find out what is Mutual Funds.

Mutual Funds Investment Guide – Step by Step

What is a Mutual Fund?

A mutual fund is a professionally managed investment vehicle that accumulates money from multiple investors like you and invests it in a diversified portfolio of stocks, bonds, or other securities.

The fund is managed by a professional fund manager or a team of managers, who make investment decisions based on the fund’s objectives and investment strategy.

It is the best way of investing if you do not know anything about the stock market and this way you can use the service of a financial expert and gain benefits in exchange for very small charges.

Types of Mutual Funds

Mutual funds come in various types, each designed to meet a specific investment objective. Here are the types of mutual funds:

Equity Funds

Invest primarily in stocks or equities of companies. They offer the potential for high returns but come with higher risks due to market fluctuations.

Debt Funds

Invest in fixed-income securities like government or corporate bonds. Debt funds provide regular income through interest payments and are considered lower risk compared to equity funds.

Hybrid or Balanced Funds

A mix of both equity and debt investments, offering a balance between potential capital appreciation and regular income. They aim to provide diversification and manage risk.

Money Market Funds

Invest in short-term, low-risk instruments like Treasury bills, commercial paper, and certificates of deposit. Money market funds are suitable for investors seeking stability and liquidity.

Index Funds

Aim to replicate the performance of a specific market index (e.g., NSE Nifty, S&P 500). These funds invest in securities in the same proportion as the index they track.

Sectoral or Thematic Funds

Invest in specific sectors (e.g., technology, healthcare) or follow a particular theme (e.g., sustainability, emerging markets). These funds are focused on specific areas of the economy.

Tax-Saving or ELSS Funds

Equity-linked savings schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act. They primarily invest in equity and have a lock-in period of three years.

International or Global Funds

Investing in assets outside India would be considered as International Mutual Funds. They offer exposure to international markets and diversification beyond domestic boundaries.

Steps to Get Started with Mutual Funds Investment

Investing in mutual funds is an amazing way to grow your wealth and achieve your financial goals. It offers an opportunity to participate in financial markets with the expertise of professional fund managers.

If you’re looking to start your mutual fund investment journey, here’s a comprehensive guide to help you get started step by step.

Open a Demat Account: Your Investment Gateway

The first step in investing in mutual funds is to open a Demat account. A Demat account is a digital repository where your investments are held in electronic form.

It is similar to a bank account but holds your securities such as shares, bonds, and mutual fund units instead of cash. To open a Demat account, follow these steps:

  • To open a Demat Account, first, you’ll have to find a participating bank or stock broker like Groww, Zerodha, etc.
  • If you’ve chosen the bank then you can simply visit the bank and fill out the demat form there are online options also available
  • If you are choosing online stock broking apps then you can simply download the app and start the registration process
  • Both of these require a KYC Process, you need to submit the documents mentioned below to complete your KYC
  • After KYC is completed, your account will be created and online access details will be provided to you

Documents Required for Mutual Funds

The following are the documents required for Mutual Funds-

  • Application Form
  • Proof of Identity- Aadhaar Card, PAN Card, etc.
  • Proof of Address- Aadhaar Card, Driving license, Passport, Voter’s ID card, etc.
  • Cheque for SIP or lump sum amount

Strategize Your Investment

Now, that you’ve opened a Demat account, you can easily start investing. But, before diving into mutual fund investments, it’s crucial to define your financial goals and assess your risk tolerance. Here’s how you can strategize your investment:

Identify Your Financial Goals

Determine your short-term and long-term financial objectives like buying a house, funding education, or retirement planning. Each goal will have a specific investment horizon and risk tolerance.

You can choose more than one or two mutual funds to satisfy your goal, remember diversifying your mutual funds will help you in reducing your risk and increasing your profit margin.

Assess Your Risk Tolerance

Understand how much risk you can comfortably take. Consider factors like your age, financial responsibilities, investment knowledge, and willingness to bear market fluctuations.

The best way of reducing the risk is to diversify your portfolio and start an SIP mutual fund due to the ease of investing and regular investment and reaping benefits over time.

Allocate Your Assets

Based on your goals and risk tolerance, allocate your assets among different types of mutual funds, balancing risk and potential returns.

Choose the Best Mutual Fund

Selecting the right mutual fund is crucial to achieving your investment goals. You can do that by first Analyzing the historical performance of funds, considering factors like past returns, volatility, consistency, and fund manager expertise.

After that, you’ll have to carefully read the fund’s offer document, which provides crucial information about the fund’s objective, investment strategy, risks, expenses, and historical performance.

Now, that you’ve listed out a few Mutual Funds fitting your financial goal, you’ll have to find the expense ratio, which affects your returns. Lower expense ratios are generally more beneficial for investors.

Remember, always opt for diversification by selecting funds across different asset classes to spread risk.


What is a Systematic Investment Plan (SIP)?

SIP is a method of investing in mutual funds, where you invest a fixed amount regularly (e.g., monthly). It promotes rupee-cost averaging and helps reduce the impact of market volatility over time.

Are there any tax implications associated with mutual fund investments?

Yes, mutual funds have tax implications. Gains from equity funds held for over a year are tax-free, while gains from debt funds are subject to capital gains tax based on the holding period. ELSS funds provide tax benefits under Section 80C.

Can I switch between mutual funds?

Yes, you can switch from one mutual fund to another within the same fund house or across fund houses. Switching allows you to reallocate your investments based on your changing financial goals or market conditions.

What is the expense ratio in a mutual fund?

The expense ratio is the annual fee charged by a mutual fund to cover its operating expenses. It is expressed as a percentage of the average assets under management (AUM). A lower expense ratio is generally preferred.

Can I redeem my mutual fund units at any time?

Yes, you can redeem your mutual fund units at any time during the fund’s operational hours.