A mutual fund is one of the popular investment options where the Asset Management Company (AMC) collects the money from several investors and further invests it in different instruments such as debt, equity, money market and securities. The consequent profit, after deductions by the AMC, is circulated among the investors according to their mutual fund investment portfolios.
Even though mutual fund investments are subjected to market risks, more people are keen to invest money in it because it can provide good returns despite mitigating losses. What’s good about investing in mutual funds is that you need not have to be an expert on the market since investments here are made by a group of experts who decide how to invest, when to invest and where to invest.
So now that you know what mutual funds are, it’s time to understand how you can invest in mutual funds:-
- Asset allocation: To start with mutual funds investment, the first thing here is to understand what kind of portfolio you want. This step is also known as asset allocation. Always allocate your assets in a way that it forms a perfect amalgamation of high and low-risk funds. As a general rule, the amount of funds you invest to low-risk debt instruments should be equal to your age. This means, any individual who is 35 years of age, should allocate only 35% of their funds toward debt instruments. This will protect them against any risk in the remaining assets that they have invested in.
- Shortlist funds type: Shortlisting the fund type is considered an important part of mutual funds investment. Once you have allocated your assets properly as per your needs, the next step is to study and compare different type of mutual funds on the basis of their past performance and investment perspective. For this, you can refer to the shareholder’s reports and prospectus provided by the AMC. The prospectus will help you get complete information about different types of fund while the shareholder’s report will assist you in understanding the past performances and regularity of returns. Apart from the research work, you must also determine your financial goals and get answers to questions like Are you investing just to substitute your income or for retirement/marriage? What is the time limit of return you are comfortable with? While short listing funds type.
- Compare funds: Once you have shortlisted the funds, you should compare and pick the right funds. For example, when looking for a mutual fund,
- Check the past records of the funds from shareholder’s report or through online websites.
- Look for the top 5 funds in the asset class that match your financial goals, time frame, and risk profile.
- Check performance of the funds for a different time frame, such as 3 months, 6 months, and so on.
- Check for the fund managers profiles and asset allocators by going through the prospectus of that particular mutual fund.
- Understand how important the diversification is: However safe your mutual fund investment may appear, it may be risky at some level. Therefore, the best way to expand your investment is by allocating assets in instruments that are not completely correlated. Make sure that your mutual fund’s portfolio is a concoction of equity, mixed market, debt, gold and other types of funds to balance out the risk factor.
So now when you have made the mutual fund investment in the selected funds, it is also necessary to keep a track of the funds you have invested in. Even though your funds are managed by investors, having a thorough knowledge of your portfolio is important.
A vast majority of us wants to be rich but often wonder if their dream could be true someday. Well, the answer to this question is yes, all of us can become rich if we work towards it. But how can one make this possible? The answer to this is Mutual Funds. Investing in mutual funds can be your quick route to be rich. Most individuals prefer investing in mutual funds when they have a large sum of money to spare. According to them investing lump sum money in funds will help them achieve their financial goals faster. This is also one of the reasons why most people defer investing indefinitely. Contrary to their common belief, investing bit by bit can also help them achieve their goals without compromising on their other financial commitments that comes along in their life.
Investing a small amount of Rs. 4,000 every month in an equity scheme can help them create an amount of Rs. 1 crore in a period little over 15 years. To make this possible all you need is discipline, which nothing other than SIP (Systematic Investment Planning) can bring when you invest. But before we start discussing about the investment strategy, let us first talk a bit about savings and investment risks.
Savings and Investment Risks
Saving money is difficult especially in this modern setup where you need to maintain a lifestyle to fit in the crowd. So how does one save money? The answer is simple: save first and spend later. This way you can control your expenses, save more and accordingly invest money to reach your financial goals.
Before you start investing, understand that investments involve risks. Be it stocks, shares, bonds or mutual funds, there is always a certain amount of risk involved. Another important rule of an investment is that riskier an investment is, greater will be the potential returns. If you want to take high risk, it is better to start investing as early as possible. It is because young investors have fewer responsibilities and resultantly higher risk appetite and risk tolerance than investors in their mid-40s. Another reason for starting early is that when you’re young you get longer time to recover from losses.
How to make a crore with mutual funds investment?
With time due to inflation, one crore price has lost its charm but the amount still means a lot to several people. Now for those who are wondering how much they should invest to achieve this financial goal, the answer is that they can start with an amount as low as Rs. 4,000 per month investment for the first year. From the next year that is the second year, they can increase their monthly investment amount by Rs. 1,000. Let’s consider that they have taken an aggressive investment approach and managed to get returns of 10% per annum. In the table given below, we have explained how the SIP value is expected to grow over the next few years at a 10% rate.
Table1. Table showing year by year growth of an SIP investment that is increased by Rs. 1,000 every year*
|Year||SIP Amount/month||Total Savings During the Year||Total Investment Value at end of year|
*Figures given in the table are suggestive and based on a constant growth at 10% per annum, which in real-life situation is not possible.
You can see in the table given above that you can definitely achieve the goal of becoming a ‘crorepati’ in 20 years. If you start with an amount greater than Rs. 4,000 then your dream of being a ‘crorepati’ can come true sooner.
Important Points that Can Get You Maximum Returns on Mutual Fund Investments
Besides SIP, there are other important points that an investor must consider to get the best out of their mutual fund investments:
- Invest keeping your financial goal and risk appetite in mind.
- Diversify your investment portfolio.
- Put money in sectors that will outperform.
- Start investing as early as possible.
People who want to increase their money over a period must invest in mutual funds. In this type of investment a good number of investors pool their money to purchase securities. It is quite popular amongst investors as it yields high returns. Whether investors are seeking for capital gains or want regular income, in mutual funds, they get a wide range of schemes to suit their requirements.
When it comes to investing in mutual funds, a common question that troubles a lot of investors is that whether they should deposit their money in bulk (at one go) or on schedule in one of the best SIP plans. To understand which mutual fund investment method is best for you, we need to first understand both investment strategies.
Systematic Investment Planning (SIP)
If you have financial constraints and cannot deposit a lump sum amount for fund investment, choose SIP. The SIP investment method is available for mutual funds, gold funds and ETFs (exchange-traded funds). In this investment method, a fixed amount of money is periodically (monthly or quarterly) deposited in the chosen mutual fund scheme. To reap the benefits of SIP, it is advisable to invest in the best SIP plans for a long term of at least five years. To learn other benefits of SIP, read below:
- Brings discipline: A large number of people make investments in mutual funds and fail due to the lack of discipline. Especially beginners find it difficult to regularly invest lump sum amount of money in fund schemes. With the help of SIP, the regularity in making an investment can be done easily.
- Rupee cost averaging: Rupee cost averaging is an investment strategy that eradicates the need to track the market. All that investors need to do is to regularly invest a pre-decided amount for a long period. Since in SIP the amount of money invested is constant, it allows investors to buy more units when market rates are low and vice-versa, thus, saving investors from the mistake of investing during market peaks and exiting during market lows by reversing the trend.
- Low investment amount: If investors choose to deposit in mutual funds through SIP, they can begin investing with an amount as low as Rs 500 per month, thus, giving an opportunity to investors from all financial backgrounds to participate and invest in the market. This also ensures that their monthly budget is not strained while staying invested in the market for a long time and yielding great returns.
- No entry or exit load: In mutual funds, many fund houses waive off entry or exit load when the investment is done through SIP investment method. This lowers the cost of your investment. In mutual funds, the exit load is usually levied to discourage investors from being in and out of schemes. However, the exit load is usually charged if you redeem units within a year of buying the units.
Lump Sum Investment
In lump sum investment, investors deposit the entire amount in mutual fund scheme at one go. Investors who have great knowledge and understanding about market’s current valuations and behaviour choose to make lump sum investment in mutual funds. It is best to invest in lump sum amount when:
- The market valuations are low.
- Market’s or a specific stock’s price-earnings ratio is low.
The above two points also hold true for SIP method of investment but in SIP the fund manager takes care of such things.
Which one is better: Lump sum or SIP?
The main purpose of making an investment is to increase money. An investor should invest money in those avenues where he/she can churn out maximum returns. When it comes to mutual funds, investors must closely study whether their funds are aligned with their financial objectives or not. They must not choose a fund scheme or an investment method because of other people but because this is what fulfils their requirements.
When it comes to deciding which investment mode (lump sum or SIP) is better, it is difficult to say as a direct comparison between the two is not possible or fair as both have their own pros and cons. Also in deciding which method of investment is better a lot of other factors come into play – the most important factor being the investor’s requirements and circumstances. For a beginner or a salaried person, SIP is a safer way to invest as it inculcates discipline to invest regularly without having much to worry about market valuations. People who closely follow market and have experience about it can invest their money at one go (lump sum). Therefore, before making the final call weigh all pros and cons and see which one out the two fits your requirement.
On an average, Indians save around 10% of their income, with the savings rate forming around 30% of the country’s GDP. This percentage is considered one of the better ones in the world. However, when it comes to actual investments, most people in the country fall on the other side of the spectrum. The reason lies in the simple fact that they consider savings accounts (or at most fixed deposits) as viable investment options. This happens because most of them have little to no idea about other safe investment avenues available to them.
As such, it is important that they learn more about investment avenues that give them better returns and are both safe and secure. This is what serious investors look for when they scout good investment opportunities.
Looking at present financial distribution system and quality of advice available in the market, mutual funds are great investment options that help a lot to investors in realising their financial goals. This article shall look at these safe and stable investment avenues in some detail.
Mutual Funds: Synopsis
A mutual fund can be called a mechanism of pooling resources from the public and investing the collected funds in accordance with the fund objective. In other terms, a mutual fund is an investment scheme which is professionally managed and is run by an assets management company that invests the money of a group of investors in stocks, bonds, and other securities. Investing in a mutual fund is easier than individually buying and selling of shares, stocks and bonds.
Often, people tend to confuse mutual funds with equity investments even though they are both completely different vehicles. Mutual funds offer investment options ranging from 100% debt to 100% equity as well as hybrid products that combine both equity and debt. Mutual funds also came out with Gold Exchange-Traded Fund (ETF) and Gold Funds, which are better investment options as compared to owning physical gold.
Investing in mutual funds helps you to diversify your portfolio across a large number of securities to minimise any risk. As an investor, you can purchase a mutual fund unit that represents your share of holding in a particular scheme. These mutual fund units can be further purchased or redeemed as needed at the current Net Assets Value (NAV) of the fund. These values are not constant and keep fluctuating in accordance with the funds holding. Each investor who has purchased a mutual fund holding shares the gain and loss of the funds proportionately.
Mutual Funds: Benefits
Mutual funds are reliable and safe investment options for people who wish to save and grow their money. They offer several benefits to the investors of which some are discussed here.
- The most significant advantage of investing in mutual funds is that people get access to a professionally-managed and diversified portfolio of equities, bonds and other securities. It would be quite challenging to create such an investment on their own with a small amount of capital.
- Mutual funds permit the investors to put in small amounts of money and still reap the benefits of investing a large pool of cash since many investors jointly hold a mutual fund. They jointly share in the gains and losses incurred by the mutual fund, proportionate to the amount they have invested in the fund.
- Mutual funds are monitored and managed by qualified professionals who create a strong portfolio for the investors. This diverse portfolio consists of stocks, bonds, money market instruments or a combination of all of those financial products.
- Mutual fund investment schemes are also transparent in their nature. The Net Asset Value (NAV) is declared daily and the portfolio of the schemes is also made available every month. There are many agencies that rate the mutual fund schemes depending on risk and reward attached to them.
Mutual Funds: Types
There various types of mutual funds categorised based on factors such as risk, assets management, speciality, benchmark, structure and their investment objectives. Some of the most common types of mutual funds are:
- Open-end Funds: In this type of mutual funds, units are open and available for subscription throughout the year. They are not listed on the stock exchange. Basically, these funds allow investors to keep the investment as long as they want. There are no limits on how much can be invested in the open-end mutual funds.
- Closed-end Funds: A closed-end mutual fund is the one in which holdings can be purchased only during the initial offer period. These mutual funds are also listed on the stock exchange and have a fixed number of shares outstanding. They also operate for a fixed duration. The investors can redeem their units only during the specified dates.