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How to buy mutual funds online?

How to buy mutual funds online - standard vs direct plan expense ratio

It is a big question for people looking out for investing opportunities in Mutual Funds (MFs) with calculated and relatively lesser risk and more importantly consistent returns that how to buy mutual funds online and there are also some other complementary questions like what scheme to buy and from where etcetera but we need to learn some basics about mutual funds and meaning and importance of the related jargons to before we dig deeper into our primary quest.

So let’s start with getting to know, what exactly is mutual fund and how is different from other investing platforms and opportunities.

Mutual fund is an investment tool which helps you diversify the risk you are exposed to. To simplify it is a pool of fund made of investment from different investors in different proportions which Fund Managers invest in multitude of securities ranging from stocks of different companies to various kinds of debt instruments and bonds depending upon the type of mutual fund, your risk appetite and consistency of returns desired. Now that I have mentioned let me first tell you who is a Fund Manager and what does he do. Fund manager is quite literally someone who manages your funds. He is one who plans and decides, where to invest the hard earned money of the buyers of the Mutual Fund scheme. Mutual funds are very important for small investors since they give them an opportunity of investing in professionally managed and highly diversified portfolios.

How many types of mutual fund schemes are there after all?

Based on various classification like maturity period, investment objective there are numerous kinds of MF schemes are available in market. Let’s discuss a few of them briefly.

On the basis of maturity period.

Open-ended Fund: It is available for subscription and can be redeemed on a continuously.

Close-ended Fund: It has a defined maturity period, say 2-4 years and they are open for subscription for a brief specified time after the launch.

Based on investment objective there are following types of mutual funds:

Equity/Growth Funds: Considerable part (more than 65%) of its compilation is equity or equity related securities and the objective of investment of these funds is long-term capital growth.

Debt/Income Funds: These funds invest extensively (almost above 65%) in debt or Fixed Income instruments such as bonds, corporate debentures etc. Low risk and consistent income are main objective of these funds.

Index Schemes: These schemes replicate the performance of an index such as the S&P CNX Nifty or BSE Sensex.

Sector Specific Schemes: Under the anvil of these schemes, investments is made in securities of the sectors specified in the Scheme Information Document like Automobile, IT or FMCG.

Balanced Funds: As the name suggests these are quite balanced funds as they invest in both debt instruments and equities with the pre-planned investment objective of the scheme.

Money Market/Liquid Funds: These funds invest short-term and relatively instruments with relatively less risk exposure like Commercial Paper Certificates of Deposit and Treasury Bills for a period of less than 91 days.

Tax-Saving: These schemes offer tax discounts to investors under specific provisions of the Income Tax Act, 1961.

There is another broad classification, Direct and Regular plans. Direct plans are sold directly to the customers by the AMC (Asset Management Company) not involving distributor whereas in Regular plans are sold via distributors and their cut is involved.

Now that we have got decent knowledge of Mutual Funds let’s discuss the primary question that we had asked in the beginning. How to buy Mutual Funds online?

First of all before buying the Mutual fund you should do an extensive research about the following:

  • Fund manager – Who is the fund manager and how is his track record?
  • Expense ratio (Operational cost of an MF) – You must be aware of the expense ratio that the company is promising because it would be paid from your pocket.
  • Portfolio Turnover (measurement of frequency with which assets are being transacted) – Very high Portfolio Turnover (PT) means too much transaction cost which you end up paying. Generally PT above 25% considered very high. So do look out for this and related statistics.
  • After doing the required research buy a direct plan saving yourself some bucks.

Always remember nothing comes for free so all the mutual funds distributor who give free advice on MFs, don’t take their advice since they are paid by the MF houses and are most likely to sell you the ones that pays them the highest commission and just in case you fall in to their trap, you will end up buying the ones with high expense ratio and we have advised you against that.

How to buy mutual funds online - standard vs direct plan expense ratio

                                       How to buy mutual funds online – standard vs direct plan expense ratio

Now that you know what to do before buying an MF scheme now the question where to buy it from.

You should use an online DEMAT account and it would be better if it is with the same bank that is selling the Fund. DEMAT accounts of Axis, HDFC and ICICI can be used for purchasing these funds online. Instead of buying mutual funds, I would recommend you going for passive index investing

Wixifi-How-to-buy-mutual-funds-online-robo-advisor-advantage-over-mutual-funds

where you pay 1/8th the fees and therefore make better returns. You could try Wixifi’s passive investing service if you like. Here is a little table that tells you about it.

Passive investing platform of Wixifi gives you a low fee index in your trading account by buying the underlying stocks. The following table explains the benefits of Wixifi’s platform.

Mutual Funds Wixifi Advantage per year
Fee Upto 2.5% <=0.3% 1.75%
Fund distributor cut Upto 3% Zero Intangible
Tax optimization You have to do this Automated for you 1.35%
Rebalancing Onus on you! Automated for you 0.30%
Optimal allocation Onus on you! Automated for you 1.00%
4.40%

Looking at the graph below you will get to see that you could easily get a yield of approximately Rs 35 Lakh on an investment of Rs 25 Lakh in roughly 20 years with an annual rate of return of 4.4 percent.

So basically with our advice and our passive investing platform you could easily buy mutual funds at much lower price and earn good returns. I hope this articles helps you to get answer of the question “How to buy Mutual Funds?”.

 

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