Buying mutual funds online? A ready reckoner to become a savvy investor

It's a brand new year and if any of the following features on your resolution list, this article may have something you want to know:

• I will start saving more and systematically
• I will start investing
• I will take an active interest in managing my investments

We have always maintained that mutual funds are probably the best suited investment products for retail investors -- offering liquidity, capital growth, transparency so that investors can save in a systematic and disciplined fashion and profit from the professional management of their funds.

We also believe that buying mutual funds online makes it possible for you (or rather forces you to) to have control over your investments, which, frankly, is the only way to ensure that your money is working for you. Which is why, as the year begins we bring you a ready reckoner on becoming a savvy mutual fund investor online.

Prerequisites to investing online

Before you set out to invest online, there are certain mandatory requirements that you need to fulfill.

KYC compliance

Know Your Customer (KYC) norms require your identity and residence proofs to be verified and recorded with a central authority. This is as per SEBI's anti-money laundering (AML) procedures, and effective from January 1, 2011, KYC compliance is mandatory for all mutual fund investors. Almost all mutual fund houses and online distributors offer assistance in fulfilling this requirement. You can also visit www.cvlindia.com to know more or to verify the status of your KYC process.

Bank account

It is also required that you have a specific bank account that you intend to make investments from. This is to confirm source of funds (again, a part of SEBI's AML requirements) and also to enable direct credit of funds to your account in the case of sale of units or dividend payout. It is also worthwhile noting that as of now, in India, third party purchase of mutual fund units (purchasing of mutual fund units from your account for someone else) is not allowed.

Functional e-mail account

Online investing means that almost all of your transactional communication and records will be sent to you over e-mail. Which is why having a functional e-mail address is a must.

Online investment account

Having the pre-requisites in place, you can go ahead and register yourself for online investments in mutual funds. Registering with an online fund distributor requires you to fill an online form, send in your documents for verification after which you receive your registration confirmation. You do this process once and you're enabled to buy units of all the leading mutual funds in India. Read more about opening an account and investing on Fundsupermart.com.

DIY mindset

Investing online really means becoming a Do-It-Yourself investor. Researching funds, keeping track of your units, dividends, value of investments -- all this will be a regular feature. The good news is that with online investing, managing investments has become a lot faster and simpler.

From information on the performances of funds, comparisons, expert advice and recommendations, to updated portfolio values, dividend records, and profit/loss snapshots, all that you need is available at a click.

With a functional online investment account, you're ready to go ahead and buy mutual funds. But which one do you select? That, of course, is the next step to master.

The following sections help you get ready to invest online and make informed investment choices.

To select funds

With a functional online investment account, you're ready to go ahead and buy mutual funds. But which one do you select? That, of course, is the next step to master.

Understand your risk profile

Investing often involves making a trade off between risk and returns, which is why it is very important to understand your risk profile.

This helps you define the split of your investment between asset classes like equities, fixed income, gold, etc. Risk appetite is not just a function of knowing how much you can afford to lose; your risk appetite is also determined by factors like age, life stage, lifestyle, etc.

Define investment amount, horizon and goal

The next important step in investing is to define the goals that you would like your investments to meet. It could be next year's family vacation abroad, or it could be a child's education ten years later.

This clarity is critical in narrowing down an investment product.

For example, equity funds are best invested in for the long term -- longer the better, as they offer the best chance of returns over inflation rate and you don't get hit by short term fluctuation.

But for short-term investments, fixed income funds are recommended.

Asset allocation

Knowing your risk appetite and investment goals gives you a broad idea of the asset allocation of your portfolio. That is, if you intend to invest Rs 500,000 over the next year, how much of that should go into equity funds, fixed income funds, ETFs, etc.

One can use a basic thumb rule of lifecycle investing -- have equity component equivalent to (Life expectancy -- current age).

For example, a person who is 30 years of age with limited liabilities can invest up to 50-70% in equity funds whereas, an individual approaching retirement, should have maximum allocation of income generating investments such as fixed deposits and low volatility fixed income funds.

A certain portion of your income (3-6 month expenses), at any given point of time, should be set aside for emergency into savings account or ultra-short term funds.

Post this, you need to start narrowing down on the specific fund types, fund houses and plans that you would like to track and invest in.

Fund selection

Once you have identified the categories of funds that you would like to invest in, start looking at the specific funds available in each category. The idea here is to select funds that have given consistent returns over at least 2-3 market cycles.

Although past performance of a fund is no guarantee of its future returns, the consistency of a fund indicates the ability of the fund management team to weather the market's ups and downs.

Use fund selectors to identify funds of each category and compare their performances over at least 3 years.

Invest

Having identified your funds, it is important to plan how exactly you will go about investing in them. You may want to start slowly, selecting a single or multiple funds that are doing well in the current market scenario, but investing a small amount systematically every month.

Once you have decided this, you are ready to go ahead and purchase your mutual funds! Buying online is generally a simple process involving selection of the fund, paying online and receiving your confirmation.

Monitor: Once invested, it is important for you to track and manage your portfolio holdings, profit or loss positions as well as your transactional records. With technology, online distributors are able to offer you website features and services to make this as painless as possible.

E-mailed transaction confirmations and records, online transaction history and updated portfolio views, as well as tracking alerts are all available to help you remain in control of your investments.

Points of sale

There are two primary options for investors looking at investing in mutual funds online:

Direct purchase from the website of the mutual fund company

Membership on an online mutual fund distributor website (like Fundsupermart) and investing through the website

Both options allow investors to purchase, sell and manage their mutual fund units online, and both are free of any charges. A big advantage of investing through online distributors is the availability of mutual funds from all AMCs at the same location.

You can buy and sell funds from across companies without the hassle of enrolling for each company separately, and view holistic portfolio statements making it much easier and faster to manage your investments.

In today's inflationary times, investing is a crying need. And with favourable markets and online technology making mutual funds so accessible, it is a great time to go ahead and buy.