Most individuals who enter the stock market believe that they need to go out and curate their own portfolio of individual stocks.. The caveat, however, is that investing in individual stocks requires you to have a fair amount of prior knowledge about the stock market, alongside various accounting and finance related skills. Here is where mutual funds and how to invest in mutual funds come in.

By making a mutual fund investment, you are essentially buying a piece of the pie of a portfolio made by esteemed and reputable investors known as fund managers.. While you might not make multi-bagger level returns through investing in mutual funds, the risk you take on is also lower, as the mutual fund has a diverse portfolio. Here’s how you can invest in mutual funds in 5 simple steps.

1. Decide the desired outcome.

Before you begin investing in mutual funds, you can benefit from outlining what your financial goals are, their time limit/durations, and your desired rate of return. Making sure you are clear and informed on these fronts and understanding how to invest in mutual funds will ensure that you have an investment path carved out for you, and a filter that will automatically see you discard mutual funds that do not meet your requirements.

2. Outline your investment terms.

When you invest in mutual funds, the risk you incur is reduced when compared to individual stocks, and your returns are on average more streamlined. However, the investment is not totally risk-free. This means that you will have to decide how much you want to invest based on your risk appetite. Taking opportunity cost into account is also beneficial, as you might be missing out on investments with better returns.

3. Pick your fund.

Arguably, this stands to be the most complex section. The stock market is flooded with mutual fund options from small, mid and large tier financial organisations with various objectives such as growth-focused schemes, equity funds, debt funds, index funds, and that’s just the tip of the iceberg. Do your share of research on the types of mutual funds before you invest in mutual funds.

4. Pick your broker.

Similar to individual stocks, in order to invest in mutual funds, you will need a DP/broker. Most industry-standard brokers and online discount brokers that let you trade in stocks also let you purchase mutual funds, reducing the hassle of having to open new accounts.

5. Time the market.

Now that you have narrowed down which mutual funds you want to invest in, you will also want to analyse the market history and trends in order to pick a good entry point. A good entry point that beats the market returns will benefit you. Essentially, try and enter the market when values have dropped across the index, as this usually implies that an overall rally will also be forthcoming.

Conclusion

Investing in mutual funds is on average, a safer endeavour than investing in individual stocks due to the reduced risk and professionally managed fund. However, mutual funds can still pose risks, and you can benefit greatly from doing your research first on various mutual funds, and following these steps in order to buy the right mutual funds for you. You can invest in mutual funds online through trusted brokers and it bodes well to consult a financial advisor in doing the same.

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