Do you remember that famous dialogue “Mutual Funds sahi he!”? Also, do you remember that
super-fast dialogue on TV ads at the end of every mutual fund “Mutual Fund
investments are subject to market risks, read all scheme related documents
carefully”. The ad attracts us to invest in mutual funds and gives a few
seconds to hear about the risk involved. India is slowly growing towards
financial literacy and thus, we should understand the risks as well as returns
associated with each investment.
What is a mutual fund? It is nothing but a pool of money
collected from various individual investors who want to invest in markets but lack either the handsome
chunk of money (thousands and lakhs of rupees) or knowledge of picking stocks.
Well, let us acknowledge the fact that not every individual in India has time
to study the markets and invest at correct time frames. This is where mutual
funds come into play.
With the growing per capita income of individuals in India,
the problem today is not with “earning the daily wages” but the problem in
“investing” the hard-earned money in appropriate vehicles.
STEPS TO BE
CONSIDERED BEFORE INVESTMENT
You cannot just blindly go ahead with investment with any
mutual fund available on paisabazaar, ET Money or your demat account. There are
a few things to be taken care of before investing:
1. Define your financial goal: What is your financial goal? What do
you want to save for? Define your purpose first. Your goal can be financial
independence, savings for marriage, for education, for a new house or any other
purpose.
2. Amount required for the goal: Quantify the figure you want
your bank account to be credited with on a certain date. This has to be crystal
clear.
3. Time Frame: Many people know the amount
they want to receive, but they are usually unclear with the time frame within
which the amount would be required. There has to be some number of years or
months on paper for which you would like the amount to be received.
4. Risk Profile: This is the most important
step. Understand the type of person you are, when it comes to investing the
money. Risk and return go hand in hand. Higher the risk, higher the return and
higher quantum of return will help to achieve the goal faster. That does not
mean you should go for the highest risk ever. Read the word “risk” as “chances
of losing your money”. Risk is also associated with liquidity. Liquidity means
the quickness of the fund manager to credit your bank account whenever you want
to redeem (i.e., sale) all your units.
5. Choosing the appropriate fund: Once the risk appetite is clear, you can choose the right fund for you. “One size fits all” does not apply in mutual funds.
WHAT IS THE
MINIMUM AMOUNT TO INVEST?
Now the question arises, “What is the minimum amount to
invest?” You would be happy to know that you can invest as low as Rs. 100 per
month. Thus, you can skip any
of the following and invest Rs. 100 per month
McAlootikki burger of McDonald’s
Golden Corn pizza of Dominos
Corn & Cheese pizza of Pizza Hut
Please focus on the fact that I said “any” of the above. Now
the basic question arises, how come such a low amount is allowed?
We have Maggi Tomato Ketchup priced at Rs. 160 approximately,
but we also have Rs. 10 sachets at a local grocery shop. If the taste is so
good, then why offer it at a lower price? Ever wondered why daily essentials
such as shampoo, bread, jam, Parle biscuits, Maggi noodles, Magic Masala are
available at around Rs. 10 per unit?
This is done to induce the customers to try it once and
acquire the taste for it. The same logic is used by mutual funds.
The approach also serves to increase the reach of financial
markets to individuals who earn less than Rs. 10,000 per month. Thus, a small
amount inculcates the habit of investment at an early stage. The point of
mutual funds is to let people know that there are better and more feasible
options for investment as compared to fixed deposits.
WAYS TO INVEST
There are two options for investment in mutual funds and
which can be used interchangeably.
1.Systematic Investment Plan (SIP):
This is called disciplined investment. This method automatically debits a fixed investment amount from your bank account (obviously with your authorisation) at a specific date on a monthly basis / weekly basis / daily basis as per your choice of frequency. This helps you build a big corpus through small investments.
2.Lumpsum investment:
Let’s say you have your bonus received in this month or a
huge amount of unexpected money has been cleared. You can invest this entire
money in one shot.
SIP vs INVESTMENT
GOAL
Your SIP decides the amount of corpus you build. As per the
paisabazaar SIP calculator, we can arrive at the following conclusion with SIP
of Rs. 100 per month:
Source:https://www.paisabazaar.com/sip-calculator/
Note:
Above calculations are based on a medium risk profile (18% is medium level of
risk).
CONCLUSION
Mutual funds are best for those investors who do not have
time to invest in a market study and prefer an expert who can manage their
money. Also, it helps to diversify your investment in various streams as
selected by the mutual fund. This further diversifies the risk, while helping
you build your money. Disciplined investing helps you during financial
emergencies. Thus, even if you have complete knowledge about the stock markets,
you should consider investing in mutual funds.
If not now, then when?
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