How to Invest in Mutual Funds?

Mutual funds are a type of organisation that collects money and pools it together to make investments in different asset classes. We all know what mutual funds are and how it works. Now we will see how to invest and how it's done?

(Source: Funds tiger)

There are two ways in which you can invest in Mutual Funds:

1. Lumpsum - This is investing a large amount at a time, you make the whole investment at once. That is you make a one-time investment.

2. SIP - SIP refers to Systematic Investment Plan. As the name suggests, it's a plan where you can make a systematic investment. This is a type of investment where you invest a fixed amount of money, at a fixed frequency over a fixed period. This is a disciplined form of investment.

This is considered a smart tool to invest in mutual funds. It is almost like the recurring deposits in a bank where you deposit the money at certain intervals. Here instead of depositing, you are investing your money. It provides a good return with an interest rate of 12% - 15%. It's always better if you invest for a long term for 10-20 years or more as it can fetch you good profits and returns.

Why Should You Invest In Mutual Funds Through SIP?

• Power of Compounding

In SIP, you invest for a longer-term regularly. The small amount you invest becomes a large amount over the years. If you invest Rs.5000 monthly for 35 years, it becomes 3.2 crores over the crore of time.

How this is done is that the amount you invest every month is compounded.

If you invest Rs. 1000 monthly at an interest rate of 10% it becomes Rs. 1100. So in the next month when you invest, you are investing 2100 ( 1000+1100) at 10% interest and it becomes Rs.2310 and this goes on.

• Easy to Invest

SIP is pocket-friendly as you don't need large amounts for investment. You can invest with an amount that is as small as Rs.500.

• Flexible

It is flexible in the matter that you decide on everything. The scheme, the amount that is to be invested, the frequency, and the period are decided by you. You can invest up to any amount starting from Rs.500 at a frequency of daily, monthly, or even quarterly. Also, you can stop it anytime you want and there are no penalties or charges.

• Less Risk

In SIP, you don't have time for the market or worry about market fluctuations. The cost of purchase averages out and you get the average price of the fluctuation.

Also, it can cope with Inflations. Inflation is a phenomenon that causes a decrease in the value of price, that is it leads to an increase in the price of commodities. In SIP, the investments you make can beat inflation and provide good returns. At the same time, it recovers over time and the fluctuation doesn't come as a disadvantage.

• Convenient

It is a convenient form of investment as the money is auto-debited from your account. There will be a bank account that is linked and the amount will be deducted from your account every month or at the frequency, you have already fixed. This makes it suitable for everyone.

• Tax saving

If you invest in an equity-linked savings scheme( ELSS), you are eligible to rebate the tax. This is applicable for tax saving under section 80C of the Income Tax Act. It helps you invest and at the same time reduce your tax liability.

What Happens If Your Account Does Not Have A Sufficient Balance?

There is an amount and frequency that you have already fixed based on which the amount will be deducted automatically on that particular date. So what happens if you don't have sufficient balance. When you don't have the required amount to make the payment, the payment won't be made and as a result, the bank will incur an amount that you will have to pay. This amount differs in each bank. If this happens for the next two months and the mutual fund's company will automatically stop and close your investment.

There are different types of funds in SIP that you can choose based on your need. They are equity mutual funds, debt mutual funds, and hybrid mutual funds. You can choose this based on your age, need, the duration for which you are planning to invest, and how much risk you can bear.

Therefore, SIP is a viable form of investment. However, you should have a financial objective and decide on a scheme based on your goal. You can purchase a SIP directly from an AMC, a stockbroker, or a bank as few banks have started to implement this system. Income and wealth are different, income doesn't make you wealthy but accumulating it and spending less would. So what are you waiting for? start small, start today.

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Author - Tess Bobby

Content Writer at Escribo