For relatively secure avenues of participating in the buoyancy in stock markets without running into the risks of the volatility and complexity, mutual funds is a very popular option. People across all age groups can invest in this instrument and can get annual returns between 10% and 18% that no debt instrument can match.
But before putting your money – SIP or lump sum – there are some points that you should keep in mind.
Money9 guides you through nine important points which will put you in the right path if you do not have a financial advisor.
Mutual funds allow you to invest small amounts starting Rs 100 – cheaper than a pack of cigarettes. It is easy to sustain.
You can invest in these funds by going to a particular company’s website or via fin-tech apps that offer micro-SIPs. Generally, micro-SIPs accept as low as Rs 100 per month.
But as a common practice, normal mutual funds accept Rs 500 per month. Still this small amount finally gives you a hefty return. Consider investing in Rs 500 per month for a period of 35 years. Even at a conservative 10% return, it would give you Rs 20 lakh.
And for equity-based funds it would give you Rs 1.5 crore at 17% return. The returns are higher at a degree of risk that is far less than what you would run into if you directly invest in equities.
Since mutual funds invest in select portfolios of assets, you get the benefit of diversification.
Diversification is a method of reducing risk by investing in more than one option. Your risk is reduced because if one option doesn’t perform well, the others will make up for its underperformance.
For example, Rs 1,000 invested in a mutual fund will get distributed across 50-100 stocks whereas with Rs 1,000 you will not be able to buy a single share of TCS or IndusInd bank.
Investment in mutual fund through SIP route is very convenient. There is no penalty if you decide to stop the SIP plan in the middle.
If you want to stop it, you simply have to opt out of the SIP plan. This has a very big advantage over recurring deposits (RD) which usually put a fine (part from low returns) if you want to stop it.
After stopping your regular SIP investment, you can choose to get back the amount or let it continue to be invested in the mutual fund. No extra charge or fine would be slapped on the investor.
Due to some unavoidable reason you don’t have enough balance in your account, you can SIP for a month or two and can again pick up investment from where you left. If the payment is via ECS, or cheque, the bank levies a charge for default or cheque bouncing.
No fine or extra charge will be levied against you. In the case of RD, you have to pay a penalty or fine for missing an instalment.
If you start earning more or if you are able to save more, you can always start a new MF investment in the same mutual fund or a different mutual fund. The extra money will also be invested for the future, which can make a big corpus.
Additionally, you can also invest in mutual funds through small monthly instalments or put in lump sums whenever suitable.
Besides if you have some money in your hand or want to increase the SIP amount, then you have the option to take a top-up facility. Under this scheme your folio number remains the same, but your contribution goes higher.
When you invest in a mutual fund using a SIP plan, you do not need to worry about timing. At times when the markets are high, your monthly investment buys you fewer units and when the markets are low, the same monthly amount buys you more units.
Therefore, in the long term, you do not pay very high prices for any unit of a mutual fund. This is called the rupee cost averaging.
When you invest in a mutual fund, your monthly SIP investment gives you a regular and stable return. Those returns are added to your actual investment amount every month and are invested again. So in the long run your continuous monthly investment and the returns earned by you will grow bigger and bigger.
Investing through mutual funds leads to better tax efficiency in certain cases. Investing in gold ETF is more tax efficient than investing in gold directly.
Besides, if you need some tax deduction then you can invest in mutual funds (ELSS fund). On the other hand if you do not want any tax deduction you can invest any of the mutual funds.
You can withdraw your invested money from a mutual fund at any time and it will usually take 2-3 days to be credited to your account.
Besides, if you want to withdrawal the amount just the next day after making an investment you can do that. The duration completely depends upon the investor’s choice except tax savings fund, which have a lock-in period of three years.
Markets regulator SEBI has imposed strict rules and guidelines for mutual fund companies that protect the investors.
SEBI is actively working on steps that benefit investors. Besides MF asset classes are regularly disclosed and audited. There is increasingly transparency is this sector.
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