The first part of this guide explains
How to plan your investment
What are the risk
Different fund types
How to choose the best mutual fund to invest
How to create the best investment portfolio that meets your financial goal.
The second part of this guide explains
How to invest in a mutual fund
What is the best way of investing in a mutual fund (SIP)
The feature and benefits of SIP Investment
Let’s straight dive into the topic.
Planning is the key to any successful investment. If you don’t have a solid plan for your investment then there is a high chance of failure to fulfilling your investment goal. Without a solid investment plan, you can not fulfill your investment goal. This Guide covers all the details information that is needed for investing in mutual funds for beginners.
Steps to plan your Mutual Fund Investment:
Before planning any kind of Investments, you need to be clear and specific about your short-term as well as long-term goals. SIP is considered the best long-term tool, so you need to focus on your long-term objectives preferably. You can plan to invest money based on multiple goals like:
Your Finance goals will be the deciding factor as to how much Debt and Equity Investments you can afford to make.
Know your Risk appetite, as to how much risk you are willing to take – low risk, moderate risk, or high risk. Before Investing, try to understand your needs and time horizon. This factor is somehow correlated to your age i.e. at a young age you can take high risks. But, as you grow up in years, you normally tend to shrink your risk area and start looking for safer investment options. Later part of this guide you will find the details about various risk types and the way to reduce the investment risk.
Its better and advisable to start investing at an early age, to get maximum returns and build an efficient Investment portfolio.
Generally, SIP is considered best for Long term Investments but you need to be more specific as to how much duration you want to invest your money. Your duration based on your financial goals can vary anything from a short duration of maybe 3 years to a very long duration of say 20 years. This is a matter of personal choice and depends on individual preferences.
You have two alternatives to Invest Offline or Online. To avoid the hassles of going and submitting the forms and documents manually to Mutual Fund companies/Banks, you should prefer the online method of Investing. There are various Online Mutual fund Platforms where you can easily fill the application forms, upload your documents and requisite proofs and go ahead with the process of investing.
So, having an online account will have long-term benefits wherein you can operate your account and invest your funds with much ease.
You can opt to invest directly if you have the knowledge and experience in the field of investing. Mutual Fund Direct plans usually carry less charge.
A direct mutual fund is a scheme that investors directly purchase from the fund house or asset management company (AMC). There is no third party, agent, or distributor involved between the investors and fund houses. Amount accumulated at the time of redemption Rs 34.51 lakhs Rs 32.55 lakhs Rs 1.96 lakhs
|Parameter||Direct Fund||Regular Fund||Difference|
|Monthly SIP amount||Rs 15,000||Rs 15,000||0|
|Investment Tenure||10 years||10 years||0|
|Amount accumulated at the time of redemption||Rs 34.51 lakh||Rs 32.55 lakh||Rs 1.96 lakh|
Because of the low expense ratio and higher return over a long period of time, the Mutual fund direct plan provides much more return than the regular plan. No Agent or distributor is involved between the investors and fund houses.
But, if you are new to investing and don’t have any knowledge as to how to start, it is better to take the help of offline financial Advisors. After the registration process is complete, the Mutual fund companies also allocate a Fund Advisor to you, who will guide your way and make your investment journey easier.
Completing your KYC details is the basic requirement while starting a SIP. Being a prospective investor, you need to fill a KYC form and submit it to the Fund house along with the necessary proofs. It is a one-time procedure, so once you fulfill KYC requirements, you can freely carry your investments.
The 3 main proofs that need to be provided are:
It is mandatory to comply with KYC requirements before investing in Mutual Funds. Do check out exclusive details on KYC or Central KYC that has replaced the earlier KYC.
Figure out the different kinds of funds or instruments available and choose the one that best suits you. Do some detailed research, based on the past performance, the market trends, and returns generated over the previous years. Although, you cannot rely completely on past performance since they are just an indicative factor and not any kind of assurance to yield high returns.
Each Mutual Fund Company/Bank has its own dates for investing. You can choose a date for monthly investment at your convenience. Generally, the dates are 1, 5, 10, 15, 20, 25 but these can vary based on different companies. You can select multiple dates for investing through SIP in different funds.
Calculate the SIP amount you want to invest every month. Based on your Income and Savings, fix an amount you want to invest in Mutual Funds through SIP. A minimum investment of Rs.500 is normally required. But, this might be different for different companies/banks.
You can opt for the Auto Debit facility i.e. money shall be automatically debited from your account each month as per your standing instructions. Hence, you can avoid the trouble of manually transferring the SIP amount every month. You just have to fill an Auto debit form in this regard authorizing the bank/fund house to deduct the payment.
You can manually transfer the SIP amount or give post-dated cheques also in order to make regular SIP payments.
You have to provide your particulars in the Common Application Form. Fill in the details as asked and paste or upload your scanned passport size photograph. After giving the KYC details, selecting the fund type, the date and amount of SIP, and submitting the Application form you are almost done with the compliance and SIP procedure.
So, now you are ready to start your monthly SIP journey, invest safely and enjoy the returns!
Also, make yourself aware of Taxes on mutual funds to help you in your tax planning.
Don’t hesitate to take the help of an experienced Fund Advisor/Financial Advisor if you have any doubt. It’s your money and you have every right to know where and how you are putting it.
Further, Diversification of Funds is the key to Reduce your losses and getting maximum returns in the long run. Split your investments in a variety of Mutual funds i.e. you can focus on different asset classes like Debt and Equity as per your risk horizon.
When we talk about investing the first thing that comes to our mind is the risk associate with the instrument and the second one is how much return it will produce in a time horizon. In this detailed Mutual fund investment guide, we cover all these aspects of investment.
Let me clear a few things, in general for any type of investment there is some risk associated with it. Even if you put your money in bank FD and somehow the bank goes bankrupt then what will happen to your money.
As of Financial Year 2020-21, if a bank default or goes bankrupt then each depositor in a bank is insured (The Deposit Insurance and Credit Guarantee Corporation Act, 1961’(DICGC Act) up to a maximum of Rupees five Lakh for both principal and interest amount held by him. This is for your information.
Most investments don’t have a guaranteed rate of return. This is because when you are investing, you are taking on a certain level of risk. Each type of investment will have different types of risk.
Now back to the topic what are the risks associated with the mutual fund? In general, we can categorize the risk for any type of investment and I am going to discuss in detail all these risks categorize for any underlying asset or investment.
The main risks are associated with any investment are as follows (mainly for mutual funds):-
When investing in the stock market you simply take the market risk. You cannot avoid this risk because it is not in your control and affects a large number of assets. Any new law or any new regulatory passes by the government that causes losses to your investment falls under systematic risk. One way to ride through the market risk is to stay invested for a long period of time.
Unsystematic risk affects very few or any particular assets. This risk can be reduced by diversifying your investment. Diversifying your investment can significantly reduce the chance of unsystematic risk. An American investor, business tycoon Warren Buffet once said “never put all your eggs in one basket”.
Mutual investment already covers this type of risk itself. Mutual funds can also invest in various assets, such as bonds, cash, or commodities like gold and other precious metals. Also, there is various type of Mutual Fund available in markets Like Equity type, bonds, and balanced fund. This gives you an opportunity to invest in various assets at the same time to reduce your risk exposure. This diversification allows investors to reduce the risk of one particular stock or sector.
This is a situation when you are not able to sell and raise money from your investment when needed. Liquidity refers to a market condition where buyer and seller are available at any time and you can sell an asset easily.
If there is not enough liquidity in the market you cannot sell an asset at the desired moment of time. To avoid this kind of risk, one should check the fund size, age of the fund before investing in a mutual fund. More details are provided in the latter part of this Mutual fund Investment Guide.
Capital risk is a possibility of a loss of part or whole of investment capital. Capital risk can be a market risk where the price of an asset moves unfavorably.
This is referring to the risk that your investment and cash flow will considerably reduce in purchase purchasing power due to inflation. The best way to beat inflation is to invest in a financial instrument that gives you a higher return than inflation over a long period of time.
Normally in the case of Mutual fund investment, you can expect a very good return that beats inflation by a wide margin. Because mutual fund investment and return are directly related to the market.
Credit risk mainly involves Bonds and debt instruments. Generally at the time of maturity of bonds the company or the institution will pay the promised principal and the interest that they owe. But some time company did not perform well and was not able to pay as they promise.
Generally, government bonds hold the least amount of credit or default risk whereas bonds were taken out by companies that have higher credit risk but also offer a higher rate of interest. There is some credit rating organization that can help you to find good rating instrument online.
There is also some other type of risk that can affect the valuation of your investment like Business risk, Currency Risk, Interest rate risk, Management risk, Regulatory or legislative risk, Political/Country risk. The mutual fund already covers all these kinds of risks by diversifying your investment.
The best part of the Mutual Fund investment is diversification of your invested amount. You invest a small amount in a particular Mutual Fund but your money is invested in many companies by the mutual funds because of this the risk associated with your investment reduces drastically.
Overall, you must diversify your investments when possible to reduce your level of unsystematic risk. However, keep in mind that systematic risk is not in our control and is dependent upon the economy. When determining what you want to invest your hard-earned money in, consider what appropriate asset allocation is for your age, risk tolerance, and time horizon.
If you do that, you will be well on your way to creating a strong financial future. When you invest, you are exposed to a mix of these risks depending upon the type of your investment. Being aware of the risks associated with an investment and weighing the potential returns against the potential risk is important for making an investment decision.
You can check the fund rating and risk scale of every fund online in various portals. The CRISIL Rating shows how the fund has historically performed compared to other funds in the category. Here I am attaching one screen short.
In this chapter, you will learn:
The Companies that deal in Mutual Funds are known as Asset Management Companies (Fund houses) where the underlying asset is Debt or Equity. Almost all major banks like SBI, Axis Bank, ICICI, HDFC, BOI, etc. have entered the Asset management business and provide mutual fund services. Other than banks there are various companies that give you the opportunity to grow your money by investing in Mutual Fund Schemes like Reliance, Aditya Birla, etc.
By Starting SIP, you can build a good corpus because of
Power of Compounding: This means you earn interest on Principal of previous year + Interest of Previous year i.e. you earn interest on your earnings also.
The high rate of returns: You tend to earn high returns by investing in Mutual funds as compared to traditional investment tools like PPF, NSC, and Bank Fixed Deposits, etc.
Benefit from Cost Averaging: In simple words, buy more units when Net Asset Value is low and fewer units when the market rises. This leads to a reduction in the average cost of purchasing.
There is plenty of reason you should invest in a Mutual fund In India. There is a lot of other investment options also available to invest your money but a Mutual fund is the best option in terms of investment flexibility, return and the best long-term investment option, for growing your money.
If you compare all of these benefits that are available with Mutual funds and compare with other instruments available in India you will definitely go with the mutual fund. Here are some benefits of investing in a Mutual Fund.
There is no lock-in period in SIP which is a favorable point for the investors who don’t want to park their money in investments having a long lock-in period like Public Provident Fund or You can initiate as well as exit from SIP at any time. But, in the case of money invested in ELSS minimum lockin period is 3 years. For details, you can refer to ELSS or Equity Linked Saving Scheme!
Qualified professionals assisted by research teams manage your money. Every Mutual Fund is managed by a qualified dedicated fund manager who has the responsibility to generate a potential return from the market, fund allocation to various instruments also take action as and when required to improve fund performance. You can get the fund manager details of any fund online from the fund-related details.
A small investor can invest even Rs.1000 in a Systematic Investment Plan on a regular basis.
Diversification lowers your risk of loss. Details about diversification are already discussed in the previous investment risk-related section.
Investments held for over 12 months are exempt from capital gains. Dividend income is Tax-Free too. You can also start SIP in Equity Link Saving Scheme (ELSS) for tax-saving purposes under 80C options.
With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Details about liquidity are already discussed in the previous section in this Mutual Fund Investment Guide.
The performance of MF is reviewed by various publications and rating agencies. A unitholder gets regular updates, like daily NAVs, fund holdings, etc. Also, SEBI (Securities Exchange Board of India) monitors all these funds regularly.
You can select any of the following types of Mutual Funds based on your financial goals, risk factor, and Investment duration.
Debt Funds – invest in Debt Instruments. Debt funds are considered a safer investment option as compared to equity funds because the underlying asset is Debt.
Equity Funds – Equity funds invest in Equity so are best suited for the ones who can afford a high-risk profile. A SIP in Equity funds is normally considered a good option for investors who prefer to invest their money for a longer duration. These usually perform well if invested for a longer duration. Equity fund further divides into three categories large-cap fund, Midcap fund, and small-cap fund.
Hybrid Funds – Hybrid Funds invest in a combination of both equity and debt i.e. you get exposure to both equity and debt. These are also known as Hybrid Funds.
Before investing anywhere, you should make yourself clear about the various asset classes.
Each category of the mutual fund has its own feature and different investment horizon. Due to the unique features of each Mutual Fund, you have to select the best one for you that meets your financial goal, risk factor, and your investment duration so that you can get a good return that beats inflation by a wide margin. The details about the features of each category of mutual fund describe below.
Large Cap Funds are less volatile but give a comparatively lower but still good return. The whole money invested in this fund goes to the equity of a large company which is resister under the National Stock exchange. Therefore the risk profile for this type of fund is comparatively lower than the mid-cap funds.
If your investment horizon is between five to seven-year you can chose this type of fund in your portfolio. You can check the fund allocation in the portfolio section of the respective mutual fund in detail on the Moneycontrol website. There you will get the list of companies in which the fund manager allocates your fund.
Here I am attaching one screenshot from the money control website for your reference. In this picture, you will find company-wise asset allocation for the Axis Blue-chip Mutual Fund Direct Plan.
Small-cap funds are more volatile and produce a high return. Diversified Funds lie in between. The whole money invested in this fund also goes to the equity of various small companies. Therefore the risk profile for this type of fund is comparatively higher than the mid-cap and large-cap funds.
If your investment horizon is in more than seven to ten year you can choose this type of fund in your portfolio because these type of fund take more time to grow your money but you can expect a very good return that beat the inflation in a wide margin. Mid-cap funds are more risky than large-cap but comparatively less risky than small-cap funds.
Balanced or Hybrid Funds are more stable as a part of the invested money goes into low-risk debt instruments. In general sixty to seventy percent of the capital of the funds is invested into an equity fund to capture the growth over time and the remaining forty to thirty percent fund is invested in fixed income instruments or less volatile assets like bonds or debt instruments. Therefore the risk profile for this fund is quite stable. Please check out the portfolio distribution for the fund HDFC Hybrid Fund Direct Plan-Growth Options below.
ELSS funds are tax-saving funds with a 3-year lock-in and less volatile high return. There is also some other types of the fund like ETF (Exchange-traded fund), Short term liquid funds, Bonds. For example, ICICI All Season Bond fund direct growth invests its total fund value in government T-bills, NCD & bonds.
Therefore the risk for your invested capital is very low. From this type of fund, you can expect a return that is far better than a Bank FD provide you or it will give a little bit more than the current inflation rate over a certain period of time. You can even invest for few days, a few months, or a few years in a short-term liquid fund for a better return than bank FDs.
Equity-based funds are subject to market risks. Some of the good websites which provide relevant information are Moneycontrol, Indiabulls, yahoo finance, Mutualfundindia, Nseindia, etc.
In this Chapter you will learn:
In short, a portfolio contains the funds or financial instruments that you chose to invest in. As per investor risk tolerance and investment time horizons, it can be classified into three different categorize an aggressive, moderate, and conservative portfolio.
I already explain the risk associate with each type of mutual fund in the Type of mutual fund and their feature section above. Now you have to do some research and choose a suitable fund for you. Later I will provide you some examples of each type of portfolio for your better understanding in this Mutual Fund Investment Guide.
An aggressive portfolio is suitable for an investor who has a higher risk tolerance and a higher invested time horizon. The investor should invest for at least seven to ten years before his invested sum returned and also be willing to accept periods of extreme market volatility thus ups and down in invested money. Aggressive portfolio investor allows this volatility for the possibility of receiving a higher relative return that beat the inflation by a wide margin.
The reason behind aggressive portfolio investors need to invest for the long term is to have high fund allocation in stock and riskier investment. If there is a severe downturn in the market then you will need plenty of time to make up for the decline in value. Simply more allocation in stock, the longer the period to invest is appropriate.
Here is an example of a portfolio allocation by mutual fund type for an aggressive investor.
35% Large-cap fund
25% mid-cap Fund
25 % Small cap Fund
15% Bond Fund
Aggressive portfolios are most appropriate for investors at the age of Twenty or Thirty because they typically have decades to invest and recover any losses they may experience, and the return is also quite high.
A Moderate portfolio is suitable for an investor who has a medium risk tolerance and invested time horizon. The investor should invest for at least more than five years before his invested sum is returned.
Here is an example of a portfolio allocation by mutual fund type for a conservative investor
40% Large-cap fund
30% Hybrid Fund
10 % Small cap Fund
25% Bond Fund
Most investors tend to fall into the moderate category, which means they want to achieve good returns but are not comfortable taking high levels of market risk.
Its best yearly gain might be 20-30%, and its biggest decline in a year may range from 20-25%.
A conservative portfolio is suitable for an investor who has a low-risk tolerance and invested time horizon from immediate to more than three years. Conservative investors are not willing to accept periods of extreme market volatility and seek returns that slightly beat inflation. Here is an example of a portfolio allocation by mutual fund type for a conservative investor.
15% large-cap fund (Index)
10% Hybrid Fund
5 % Small cap Fund
45% Bond Fund
35% Cash/Money Market
The highest gain this portfolio might have in a calendar year might be 15%, and the worst decline might range from 5 to 8%.
Keep in mind that all investors are different. Even if you fall into one of these three broad categories, your financial situation may differ from that of others. One final piece of advice, before investing in any mutual funds please check the fund’s portfolio and asset allocation( you can check it from the Moneycontrol website).
If you choose two funds of almost the same portfolio your investment risks increase as well as your profit also increases when both funds perform well but you will be in a double loss at the time when funds do not perform well.
You need to read and understand the all information that I provided above before selecting the best fund for you. In a nutshell, the steps are:
After deciding all the parameters, you can go to the Moneycontol website to get the details about the funds that are available. For your reference, I am attaching the screenshot. In the filter area, you can change the filter criteria as per your requirement like fund house, fund category, fund rank, etc. Hope this may help you.
The second part:
In this chapter, you will learn:
You heard about SIP or Systematic Investment Plan in Mutual funds. You might think to invest your hard-earned money through the SIP route in the mutual fund. This Mutual find investment guide will fulfill your purpose.
What to do, how to move ahead, and park your funds in the best possible manner through SIP? What should be your plan of action once you decide to invest in SIP How to go about it? What are the steps for investing in SIP and how to proceed further? What is the best fund that suits your investment goal?
These are the various queries that might worry you again and again. With the help of this blog, I will try to answer your queries and clear your doubts so as to help you invest your money in an efficient way.
SIP i.e. Systematic Investment Plan is a common method followed for wealth creation in the long run. People generally get confused and think that SIP is some investment or product. But, you should know that this is just a method or way of investing. Instead of putting a lump sum amount altogether, you just have to set your own budget and put small amounts every month through SIP.
In short, SIP is a method of investment where a fixed amount is invested into mutual funds at regular intervals. SIPs usually reap higher returns if the investment is done for a longer duration.
When you invest money through SIP, your money is invested in Mutual funds. Mutual funds further invest your money in:
The returns are based on the performance of these funds over a period of time. Mutual Funds are subject to market risks. So you need to be extra careful while investing in them. But, based on historical data and past performance MFs perform well over a longer period.
Investing your money in Mutual funds, that too by choosing the SIP route is considered the best long-term investment option, for growing your money.
Before introducing SIP in the mutual fund, very few people know about the Mutual Fund as a financial instrument. After introducing SIP in Mutual Fund it became very popular among the investor for long-term investment purposes. Here are details about the benefits of investment through the SIP route.
You attain investment discipline as a fixed amount needs to be invested regularly. This helps in maintaining a focused approach and building a good corpus for yourself. Moreover, parting from a small amount like anything ranging from Rs.500 to Rs.1500 monthly does not seem to be a difficult task. It just inculcates the habit of saving.
E.g. If you are a salaried person getting a monthly salary, it is a very good option to have monthly investments of Rs.500 or Rs.1000 in the form of SIP.
All the processes have been made online for the convenience of investors. You just need to set aside small amounts for investment. With the facility of ECS mandate, you can even instruct the bank to allow auto-debit from your savings accounts towards SIP. This will save you from the hassle of signing cheques or making payments yourself. Also, there shall be no chance of missing the monthly or quarterly investment as the case may be.
Investors buy more units when the market is low i.e. NAV (Net Asset Value) is low and buy fewer units when the market tends to rise. This leads to a reduction in the average cost of purchasing the financial assets. This can be seen if the investment is done for long periods where the investor gains maximum benefits due to better cost averaging. Hence you reduce the impact of market volatility on your purchased asset.
If you invest small amounts today, you can build a good corpus for your retirement. This is possible with the power of compounding.
In simple terms, Compounding refers to when Interest of the first year is added to the principal amount of next year and in the next year, you earn interest on both Principal +Interest(For Yr 1). This means you earn not only on the amount invested but on the closing balance including interest earned.
So, the earlier you start investing, the less amount you need to invest over a longer period and the maximum returns you can enjoy. The magic of compounding helps you set a big corpus for your after retirement life.
You can make way for sound financial planning by investing at a young age. These small investments done now will grow your money and you can enjoy higher returns in the years to come.
With the help of cost averaging, you tend to yield high returns over a long period of time especially in equity SIP. But, investing in equity is meant for risk takers since it does not guarantee assured returns. So, debt funds are a good investment option for the safe players who don’t like taking much risk.
Hence, SIP is considered best suited for those having long-term financial objectives. At maturity, you will have a huge corpus to meet your needs.
Example: If your child is 2-3 years old and you start your monthly SIP today at an amount of say Rs.3000. You will get a lump sum amount of Rs.25 lakhs approximately after 20 years when your child will pursue higher education. This is just an example based on the average rate of return of 10%-11% over the period. In reality, you are likely to earn a bit of lower or higher return over the SIP period.
You can invest through the lump sum mode as well. But, in the present financial scenario, where the markets are highly volatile, SIP is considered the safest mode of investing your money in the long term. Hence, SIP is often referred to as one of the best methods of investing money to plan your Long Term Investments.
SIP can be started by individuals of any age. But, the earlier you start, the better the financial portfolio you can build to reach your goals. Early birds usually win, so be an early bird and plan your financial goals well in advance to reap higher benefits.
Here are few things discussed that give you an idea to understand why SIP is more popular among the investor in recent Days.
You contribute in the form of small amounts weekly, fortnightly, monthly or quarterly as per your convenience. E.g. you can invest Rs.500 per month also or Rs.2000 on a quarterly basis.
You can choose from a variety of financial instruments in mutual funds i.e. debt or equity. These are best suited for long-term wealth creation and fulfilling your long-term goals. The returns are based on how the funds have performed over the SIP period.
You can open a SIP for say 5 years, 10 years, or 15 years period. The Investment amount is fixed throughout the SIP period. You cannot change the regular SIP amount during its tenure. But you can cancel your SIP registration anytime. Post-dated cheques or Bank ECS Mandate can also be given to Mutual Fund Companies in order to process your requests.
The procedure for investment in mutual funds has become much simpler than it used to be a few years back. You get to explore higher returns while investing small and regular amounts based on market fluctuations.
If you want to add anything, any information, or opinions, feel free to share your valuable feedback. Don’t hesitate to share the blog with your family and friends so as to make them aware of this topic.
Hope you found the information useful! You are most welcome to give your valuable feedback in the Comments section below. Do share your experiences on the same, which might help someone in his investment planning.
And yes, if you liked it, don’t forget to share it with your family and friends…
Enjoy Your SIP Journey!
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