Mutual funds are a pool of professionally managed funds where the fund manager, depending on the nature of the schemes, implements an investment strategy that allows him/her to buy/sell securities in accordance with the scheme’s investment objective. Mutual fund houses/AMCs collect money from investors sharing a common investment objective and invest this pool of funds across the Indian economy depending on the scheme’s risk profile. The money is invested across multiple money market instruments such as stocks, debt, corporate securities, government bonds, debentures, treasury bills, etc.
Mutual fund investors are allotted units depending on the fund’s existing NAV (net asset value) in tandem with the investment amount. The performance of a mutual fund may rise or fall in tandem with the performance of its underlying assets/sectors/industries in which it invests. Mutual funds are supposed to offer diversification as they give investors an opportunity to make profits from investing in various markets through one single unique investment. They also offer active risk management, for which fund houses levy charges on investors in the form of an expense ratio.
What is SIP?
Mutual fund houses generally offer investors with two payment options – they can go the traditional way and make a lump sum investment, or they can opt for a Systematic Investment Plan (SIP). SIP is a new and convenient way to invest in mutual funds. Those who wish to give their mutual fund investments a systematic approach are preferring SIP over one time lump sum investment. With SIP, one can invest small amounts at regular intervals instead of exposing their entire investment amount to market volatility right at the beginning of the investment cycle.
5 simple steps to follow for new SIP investors
If you are new to investing and planning on starting a SIP in mutual funds, here are 5 simple steps to make your investment process simpler:
- Choose between Intermediary and AMC
Today there are multiple fund houses and Asset Management Companies offering mutual fund schemes in almost every product category. Investors are expected to first determine whether they want to directly invest through an AMC or do the same through intermediaries. Remember that when you choose to start a SIP through an AMC, you will be completely on your own. However, if you invest through an intermediary for example, a financial advisor or a bank, you will get guidance on how much and with funds to invest depending on your financial goal, risk appetite and investment horizon.
- Get you KYC sorted
In order to invest in mutual funds you need to be a KYC compliant individual. Know Your Customer, abbreviated as KYC is standard procedure for anyone who seeks investments in mutual funds. KYC is a standard procedure that requires potential investors to submit their basic details like name, age, etc. along with proof of residence, passport size photographs and identity proof. Investors can either get their KYC done online or visit the AMC and get it manually done.
- Decide how much you want to invest
Suppose you wish to invest Rs. 1.2 lakh per annum in a mutual fund, then you will have to start an SIP or Rs. 10,000 per month. It is better that you invest an amount that you are comfortable with and know that you can invest that amount every month without having to worry. There are some mutual funds that offer SIPs at an amount as low as Rs. 500 per month.
- Decide a fund
Whether you want to invest in an equity fund that offers a high risk/rewards ratio, or a debt fund that is less risky as compared to equity funds, or whether you want to invest in a balanced fund that invests in both equity and debt securities. Decide on a fund depending on your risk appetite before starting a mutual fund SIP.
- Decide the type of SIP you want to invest
Apart from standard SIP, fund houses also offer other types of SIPs such as perpetual SIP, top up SIP, Trigger SIP and Flexi SIP. If you are new to investing you may stick to the standard SIP, however if you wish to increase the SIP amount every year, you may opt for a top up SIP.
Mutual fund investments are subject to market risks, read all scheme related information carefully.