What are Mutual Funds?
A Mutual Fund is an investment, just like a Fixed Deposit or Post Office Term Deposit. Let us assume you are an investor who does not have experience in managing money and taking investment decisions, but you are looking for better returns. You need professional help to manage your money and receive good returns. So, all you need to do is invest in Mutual Funds. If you invest in Mutual Funds on a monthly basis it is called SIP (Systematic Investment Plan).
Fixed Deposit (FD) interest 6-8% Vs Mutual Funds (MF) may get >12%
Post Office interest 7-8% Vs Mutual Fund may get >12%
How does it work?
A Mutual Fund starts by collecting money from investors. Let us say 10000 investors have each invested Rs. 10000 in the fund. So the total amount collected is Rs. 10 crores. This amount is then managed by a professional fund manager who invests it by purchasing shares and bonds depending on the type of Mutual Fund. The profits from the investments are shared by all the investors.
Advantages of Mutual Funds
The major benefits of a mutual fund are –
- Expert Money Management Many investors might not have the time or knowledge to invest in stock markets. A professional fund manager from the mutual fund company will have better knowledge of how to invest the money for best returns.
- Easy Investment Process One can start investing in any Mutual Fund in less than few minutes without the need of any paperwork. All the transactions can be done online as well.
- Liquidity Most Mutual Funds can be redeemed anytime and the investor will receive the amount in his bank account within few days. There is no lock in period like in Insurance and Post Office Deposits. This makes sure that the money is available in case of emergencies.
- Wide variety of options There are different types of Mutual Funds available to suit any investor. Safe funds (Debt funds) meant for short term to High Risk funds for long term, and Tax Saving (ELSS) funds. Investor can choose from any of the funds depending on his needs.
How are returns calculated?
When an investor buys a Mutual Fund, they are provided with units. The cost price for each unit is called NAV or Net Asset Value. For example, if you have purchased a Mutual Fund for Rs. 10000 at a price (NAV) of 100, then you will receive 100 units. One year later, the shares invested by the mutual funds have increased in value so the NAV increases to say 105. You can now sell your units at NAV of 105 for a total value of 100 x 105 = Rs. 10500. So your profit is Rs. 500.
This is a simple strategy for accumulating wealth over a period of time by investing regularly at a fixed interval of time in mutual fund schemes, this is similar to the concept of recurring deposits scheme, but this being in equity come tagged with relatively a higher risk and higher return than the recurring deposit.
What is Systematic Investment Plan?
An investor commits to invest a specific amount for a continuous period at regular intervals, this ensures that he gets more units when prices are lower and fewer units when prices are high, this works on the principle of rupee cost averaging when invested at different levels and automatically participate in the swing of the market.
Advantages of Systematic Investment Plan?
Power of Compounding, To avail the benefit of power of compounding one has to start early and invest regularly, a delayed investment will lead to greater financial burden to meet the required goals, at early stage a less investment needed where as more investment is needed at a later stage to accumulate the same planned corpus.
- Rupee-Cost averaging
It means averaging the cost price of your investments.
SIP helps in averaging the cost as equal amount is invested regularly every month at different NAVs. SIP works well in a volatile market as in the months where markets are down you get more number of units as the NAV is down and when the markets are up you get less number of units. But over all the prices gets averaged out.Let us see how: Say you make your first investment of Rs 1,000 at a NAV of Rs 10. In this case, the units acquired will be 100 (1,000/10). You make the next investment of Rs 1,000 at a NAV of Rs 12. Units acquired now will be 83.33333 (1,000/12). Now also suppose that you make the third investment of Rs 1,000 at a NAV of Rs 9 and the units acquired will be 111.1111 (1,000/9). The average purchase cost works out to Rs 10.19 (3,000/294.4444). -
Convenience:
It is very easy to start an SIP, you need to plan your saving wisely and keep aside some amount of money every month for investing in funds, investment can be done either by post-dated cheques or through ECS instructions in specific fund house scheme, it’s always better to start at an early age with small amount and increase the same from time to time. If you have not invested yet, start now without any delay, waiting for the right time to invest can lead to missed opportunity, a Systematic Investment Plan (SIP) is a smart way to achieve your various financial goals and ensures you with the required corpus which was initially planned for the specific requirement.One can take the benefit of SIP only, when you choose the right schemes and be faithful and continue to stick to it, without any deviations.
SIP investment in well diversified and good performing scheme that can provide financial solutions to your long-term goals like child education, marriage and your retirement.
An investment of Rs.2000 every month for the next 15 years at 15% return per annum can fetch you Rs.12,32,731 at the end of 15th year (solution for your child education).
An investment of Rs.3768 every month in the next 20 years @ 15% return per annum can fetch Rs.50 lakhs at the end of 20th year. This could be the solution for your retirement. - Discipline
As the name says, the investment in a SIP is systematic. Investing through SIP inculcates discipline. In a SIP a fixed amount is deducted every month from your account and invested in your selected fund. So, once you have set up the SIP by selecting the amount and number of installments, you don’t have to do anything apart from ensuring that your bank account has the money available in it on the installment date. - No Timing the market
Investors are always in a dilemma that if it is a right time to invest or not. No one can predict which may the market will move or if the market has achieved its peak or low point. Investing through SIP resolves this dilemma as it is a periodic investment which occurs across market cycles. SIP is not free from the market volatility and the fund value may go down, but it frees you from the worry of market movements. - Achieve your Goals
SIP is a great tool through which you can achieve your financial goals. Say, you want to buy a car in 5 years which costs Rs 7.5 lakhs. Accounting for 6% inflation in 5 years it will cost approx. 10.04 lakhs.
If you invest in a mutual fund which gives you 12% yearly returns for 5 years, you will need to invest approx. Rs. 5.7 lakhs to achieve your goal.
However, if you go through SIP route, you need to invest only Rs. 12,593 Rs. per month for 5 years in the same fund where you expect to get 12% return.
This shows that through SIP you can achieve your goal by investing a relatively small amount monthly. - Power of Compounding
When you start to invest early and invest for long term, you take benefits of power of compounding. For example, a monthly SIP of just Rs. 1000 done for 30 years will yield you Rs. 30 lakh if your investment earns a return of 12%.
However, if you start late by 5 years, then the same investment of 1,000 Rs. will yield you just Rs. 16.8 lakh which is 45% lower than the SIP investment started just 5 years earlier. Hence, even if you have only a small amount to invest, you should start a SIP as early as possible. - Easy to invest
SIP can be started for an amount as low as Rs. 500. Investing in SIP is a hassle-free process as the amount will be deducted monthly from your bank account automatically once your one-time mandate is approved.
There are numerous benefits of SIP for the investor and it is the perfect method to accumulate wealth by regular investing over time. What are you waiting for, start a SIP today?
