How to select and invest in a fund

I would also like to invest in other funds. How must I select them?

Must I have a demat account?

I have heard that post-dated cheques are used in investing through the SIP route. Is that so?

Are close-ended funds a better option for long term investors like me instead of open-ended funds which are subject to more churning due to redemption pressures?

- Mukul Pawar

We rate funds giving them a rating of one to five depending on their performance and risk. You can refer to our list of five- and four-star rated diversified equity funds to select some funds for investment. You can even look at them for tax saving funds, which are known as Equity Linked Savings Schemes.

Close-ended funds are those from which you cannot buy and sell units during the tenure of the fund. You can only buy units when the fund opens and sell them when it closes since these funds have a fixed tenure. Open-ended funds are those from which you can buy and sell units anytime.

Investing in a closed-end fund can make sense if it truly close-ended, which means there is no exit option (for you to sell your units) before the expiry of the tenure of the fund. It is only in this type of fund that the fund manager is able to invest keeping a specific time frame in mind and does not have to worry about redemption pressures.

Unfortunately, most of the close-ended funds launched in the last few months are not truly close-ended; they provide the exit window intermittently. So, every month, they will allow you to sell during a fixed time frame. Therefore, the basic purpose of a close-ended fund is defeated.

Moreover, they also suffer from a disadvantage -- you can only make a one-time investment in them when they are initially open for subscription, rather than investing systematically.

To invest in mutual funds, you do not need a demat account. It is only needed for a few close-ended schemes that are listed on the stock exchange. For all others, you only need to fill up an application form and issue a cheque.

To invest through the Systematic Investment Planning route, you can use the Electronic Clearing System facility through which your bank account is automatically debited with the amount of investment in favour of your chosen fund. So you specify the date and amount for each month or quarter, and the amount is directly taken from your bank account and invested in your fund.

If you do not want to do this, you can issue post-dated cheques.

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