A Beginner's Guide to Investing in Mutual Funds

Mutual finds can be a smart way to clone your money in the short term as well as long term, but it makes plenty of people break out in a sweat. To help you get a better grip of mutual funds, we tapped on Dipika Jaikishan, Co-Founder & COO Basis, an app-based platform that helps women sort their finances through knowledge boosters, supportive communities and expert advice, to explain all that you need to know about the investment tool. “Investment does not mean that you have to open a trading account, keep track of how every share is doing, and buy and sell at the “right time” to take home a tidy sum.  This exercise is not only tedious but also requires a lot of knowledge and research - and time of course. A simple and effective answer to making smart investment choices is mutual funds,” says Dipika.  

What are mutual funds? 

“A mutual fund is a kind of investment tool where professionals (fund managers) offer to manage your money. They take varying amounts of money from several individuals, pool it into a big fund and invest this in several securities depending on the objective of the fund. 

It ensures that even if you are investing ₹1000, it is spread across a bunch of securities, offering you diversity and protecting you from market volatility. What this means is that even if one of the companies your mutual fund is invested in does not perform well, because of the sheer numbers of securities the fund may have, your money is not entirely at risk. This is called diversification - or putting your eggs in different baskets, lest one tip over!” Says Dipika.

Needless  to say this is a better way of investing compared to putting all your money in one share and losing it all if the company does not perform. There is a mutual fund option for every risk profile: from extremely low risk to extremely high risk. You need to assess your personal needs and then take a call.

Different Types of Mutual Funds 

“Broadly speaking, mutual funds invest in equity funds, debt funds or a combination of both,” explains Dipika.  

1. Equity funds invest in the share market and are usually prone to risk. The returns are hence in line with the risk. “You can pick an equity fund if you are in your prime earning stage and willing to invest for a longer period of time. Another type of equity fund is the tax-saving  ELSS (Equity Linked Saving Scheme) which has a lock-in period of three years,” says Dipika.

2. Debt funds are lower return, lower risk. Here your money is invested in bonds, government securities, etc. “You can look at debt funds if you are looking for steady returns,” she advises.

There are many other categories and subcategories of funds. They may be “open-ended” - meaning you can start at any time and exit at any time.  They may be “closed-ended” meaning you can only invest in them at a specific time. 

She simplifies the process by suggesting that the most effective way to invest in mutual funds is goal-based investing. You need to ask yourself a set of questions before you decide. The questions are as follows: 

• What is the purpose of your investment?
• Are you investing to grow your money, to get a regular income, to save for retirement, or to save tax?
• How long do you intend to stay invested?

You could begin mutual fund investment by taking the help of Systematic Investment Plans (SIPs).

What is a SIP?

For the uninitiated, SIP, as the name suggests, is a systematic, structured way of investing. It essentially involves an automatic deduction of a fixed sum of money from your bank account, which gets invested at regular intervals in the mutual funds of your choice. The amount to be invested can be as low as ₹500 and can be increased as per your affordability.

“Mutual funds help you participate in a wide variety of stocks or debt instruments by purchasing individual units of the fund. SIPs give you a convenient way to invest in these mutual funds regularly - without you having to do any work. Every month that you put in money in a SIP the Asset Management Company (AMC) managing the mutual fund, purchases equivalent units of the mutual fund. Just like EMI is an instalment towards repayment of a loan, SIP is an instalment towards building an investment corpus,” says Dipika.

Why should you opt for SIPs?

Apart from the obvious benefits of making investing a habit, and the option of starting from small amounts, SIP as a mode of investing has several advantages. Dipika lists the advantages below.

Compounding benefit: SIPs help you earn returns on returns. Each subsequent SIP builds on to your investment corpus, allowing you to earn returns on the returns on your earlier investment instalments eventually accumulating a substantial corpus.

Rupee cost of averaging: With SIPs, you buy more units of a mutual fund when the markets are down and fewer units when the markets are up. Hence, SIPs are an excellent way to beat the ups and downs in the equity market. You don’t need to worry about “timing” the market when you invest in mutual funds via SIPs.

Investing flexibility: SIPs offer a plethora of features which make them a very flexible mode of investing – top-up feature- (where you can increase the amount of your ongoing SIP), pause feature and many others.

How do you set up a SIP?

To invest in any mutual fund through SIP, you are required to set your e-mandate. “The e-mandate process pre-approves the fixed amount to be deducted from your bank account every month and can be done through various online platforms easily, including directly from the mutual fund’s website,” says Dipika.

Is SIP only for small savings?

“Not at all. SIP is an efficient mode of investing. While it has low minimums, it has no real maximum threshold and can be used to invest any sums of money in a structured and consistent manner,” she explains.

So, no matter whether you are putting in small or large sums, SIPs can be your go-to mode of investing in mutual funds to set you on track to achieve your goals!