SIP Investments - Karan Batra

Systematic Investment Plan (SIP): 101

Systematic Investment Plan, commonly referred to as an SIP, is used by investors to invest regularly a fixed sum in your favorite mutual fund scheme(s). In SIP, a fixed amount is automatically deducted from your bank account every month & it is invested in a mutual fund of your choice. You can start with a SIP of as low as Rs. 100 or Rs. 500 per month.

Mutual fund

Types of Mutual Funds

“Embrace those things that make you unique”

Absolutely! We are unique and so are our financial needs. Someone might want to build a house, while someone would want to save for their child’s education or marriage. Some might want to build a corpus for their retirement, and some might just want to invest to save and get better returns. When investment needs are so different, how can they all be served through a Bank FD or RD? We definitely need flexible plans that blend and suit our financial requirement. And this is possible with Mutual Funds. Mutual Funds have various categories of funds that serve different needs and this article will throw light on them.

The broad category of Mutual Funds includes:

  1. Equity Funds: Equity Funds invest in shares of companies that have different market-capitalization. They are meant for investors that have a long investment horizon i.e 5 years or more. Equity Funds generate high returns, which also indicate high risk, thus it’s important for investors with higher risk tolerance to opt for Equity Funds. Since investors under this category remain invested for a long period of time, there is sufficient time for the fund to overcome the market fluctuations.
  2. Debt Funds: Although Debt Funds have no guarantee of returns, they primarily invest in treasury bills and corporate bonds, therefore the returns earned by debt funds are most often predictable thus making them a less risky option than Equity Funds. Conservative investors who have a lesser risk appetite, looking for moderate returns and have a financial goal that is either short term ( 3 months – 1 year) or medium term (3 – 5 years), can opt for this option.
  3. Hybrid Funds: Hybrid Funds invest both in equity and debt instruments. They form a perfect combination, meaning they provide better returns than Debt Funds and at the same time are less riskier than Equity Funds, thus avoiding excessive risk and providing both income and capital appreciation. Investors who have a lesser risk appetite, but at the same time want their investments to have equity exposure, can opt for this option.

Mutual Funds can also be categorized based on Market Capitalization:

  1. Large Cap Funds: Large-cap funds are those that invest primarily in companies that have a large market capitalization, these are companies that fall into the top 100 ranks (as per SEBI). Investors who have a lesser risk appetite can opt for this option as these funds have fewer fluctuations when compared to Mid Cap and Small Cap funds. However, it is recommended that investors remain invested for a long period of time, say 5 – 7 years or more.
  2. Mid Cap Funds:  Mid-cap funds invest in companies that have mid-market capitalization i.e. companies that fall between the rank 101 – 250 (as per SEBI). In short, mid-cap funds lie between Large Cap and Small Cap funds. So investors who have higher risk tolerance and are willing to face higher market volatility than large-cap funds can go for mid-cap funds. However, first-time investors are not recommended to choose this option.
  3. Small Cap Funds: Small-cap funds are the riskiest and most prone to market fluctuations when compared to Large Cap and Mid Cap Funds. Investors who have high-risk tolerance and want aggressive returns can choose this option. However, it is highly recommended that investors only invest a portion of their portfolio in small-cap funds.

This is not all: Mutual Funds can further be classified on the basis of Risk levels, structure, asset classes, investment objectives, or even expense ratios. But the right way to choose a Mutual Fund must be based on the investor’s profile:

  • Investment horizon: duration of the investment
  • Risk Appetite: The level of risk an investor can tolerate
  • Returns: The percentage of returns an investor expects from an investment
  • Financial Goal: the objective of the investment

 

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mutual funds

Aren’t Mutual Funds Risky?

Although Mutual funds are regulated by the Securities and Exchange Board (SEBI) of India,  people are skeptical of investing their money in Mutual Funds. The reason for this phenomenon is “Safety of your investments”. Since Mutual Funds are linked to the market, investors doubt the safety of their funds and the guarantee of their returns. This article addresses the concern and lists out reasons to prove that investments in Mutual Funds are safe even though they are risky:

Regulated

As stated before, SEBI regulates Mutual Funds with the intention to protect the interests of the investors. SEBI sets guidelines that help investors in comparing various funds and also have categorized Mutual Funds into – Equity, Debt, Hybrid, Solution Oriented, and Others. This makes the entire system simplified and uniform.

Diversification

Mutual funds have definitely capitalized on the quote “Don’t put all your eggs in the same basket”. Mutual funds wisely invest your funds in various instruments such as stocks, bonds, company shares, etc. Thus reducing the risk that could arise from investing in a single stock.

Reduces Risk

Mutual Funds are managed by Professional Fund Managers. They make decisions regarding the buying and selling of funds based on research and abide by the standards set by SEBI. They constantly evaluate the investments and address risk by diversifying asset portfolios.

Inflation-beating returns.

Mutual Funds account for inflation. The inflation rate in India has been between 4% – 7% and with Mutual Funds, investors have the potential to earn more than 15% in returns, which easily beats inflation. Thus the real interest rate (i.e. nominal interest rate – inflation i.e. 15% – 7%) is more in Mutual Funds when compared to FDs.

Flexibility   

Emergencies such as accidents or health issues are uninvited guests in anyone’s life. One way to face them is to be able to access your money easily. With Mutual Funds, you can withdraw your funds anytime and the amount gets credited to your bank account. Also with Finity, you can invest for a specific goal (retirement, child’s education/ marriage, vacation) or just park your money aside with 3-year investments.

A fund for every investor.

Investment decisions have to be made based on the investor’s risk appetite & investment horizon and with Mutual Funds that is possible. Mutual Funds provide tailor-made funds that suit your financial needs. Right from short term funds to long term funds, Equity Funds (High risk, high returns) to Debt Funds (low or moderate risk and returns), you can find them all under one roof of Mutual Funds.

“Everything you want is on the other side of fear” Jack Canfield

Now that we know Mutual Funds are not as risky as they seem to be, let’s overcome the fear. Don’t Delay – Invest Today!

Mutual Funds

Basics of Mutual Funds

Investments and returns are two sides of the same coin. The primary goal of your investments is to earn substantial returns and one such instrument that helps you with that is Mutual Funds. A Mutual Fund invests money in various financial instruments such as stocks, bonds, company shares, etc, by pooling in money from several investors. The money collected is managed by an Asset Management Company (AMC) and the person who drives this investment vehicle is a Fund Manager.

Mutual Funds comes with two plans – Direct and Regular plans. The major difference between these two plans is that with Direct Plans an investor buys Mutual Funds directly from an Asset Management Company (AMC) and with Regular Plans an investor does the same through an intermediary (broker, advisor or distributor). Now, the question is why do you buy Regular plans when the same can be bought directly? With Direct Plans you get to earn 0.5% – 1.5% more returns than Regular Plans because:

  • Expense Ratio – The Expense involved in a Direct Plan is lower. Unlike Regular plans, Direct Plans do not involve commissions that are to be paid to intermediaries.
  • Returns – Since they have a lower expense ratio, Direct Plans provide higher returns.

So why miss out on Higher Returns? If you have invested in Regular Plans, it’s highly recommended that you quickly switch to Direct plans.

Speaking of returns, Mutual Funds are risky because they are linked to market conditions, but due to high risk, they also provide higher returns (returns more than traditional instruments such as FDs, RDs or PPF). The current interest rate for Fixed Deposits is anywhere between 4% – 8.5% but with Mutual Funds, an investor has the potential to earn returns of 15% or more.

Inflation is yet another important factor to be considered when it comes to investment and Mutual Funds account for it. The inflation rate in India for the past 10 years has been between 4% – 7%, which means that the returns earned minus inflation are higher when it comes to Mutual Funds when compared to FDs.

Now that we know Mutual Funds are the best option for investment, the often debated question is whether to invest in small amounts (SIPs) or lump sum in Mutual Funds. Systematic Investment Plans (SIPs) are a way of investing a fixed amount in a monthly/quarterly basis, whereas lump sum is a one-time investment in Mutual Funds. However, SIPs are more beneficial than a lump sum, let’s find out why?

  • Systematic – SIPs inculcate the habit of savings by investing a fixed amount at regular intervals.
  • Less Risky – With SIPs the money is spread over various intervals of time. This reduces your risk and protects your investment during times of market volatility.
  • Rupee Cost Averaging – With SIPs you get the opportunity to hold more units. With SIPs the money is distributed during different phases in the market which means when the market is low, you get to buy more units. This gives the opportunity to sell high when the market is favorable.

“Risk comes from not knowing what you are doing.Warren Buffett

Now that you know everything about Mutual Funds, then what are you waiting for? Start investing with Finity! You can start a SIP with just Rs. 500 in Direct Plan Mutual Funds today. 

Myway Wealth is now Finity!

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