Understanding Mutual Funds

By | August 8, 2016

Understanding Mutual Funds

Mutual Funds can be intimidating for new investors. This is your guide to understanding Mutual Funds. We simplify Mutual Funds for you, give you some tips on getting started with your investments and tell you how Systematic Investment Plans are your best bet to beat market volatility.

A Systematic Investment Plan (SIP) is a way to invest a certain sum in a Mutual Fund scheme over a regular period.

Investing in Systematic Investment Plans

How often to invest

You can invest a certain fixed sum of money in a scheme on a monthly or quarterly basis. Make payments through post-dated cheques or through an auto-debit standing instruction.

Types of Mutual Fund Schemes

There are two main types of schemes in Mutual Funds. These are Debt Schemes and Equity Schemes.

What is a Debt Scheme?

With a Debt Scheme, you invest in fixed income securities such as government securities, money market instruments, corporate debentures, and bonds. This investment scheme offers a regular and steady income to an investor.

Benefits of Investing in Debt Mutual Funds         

If you don’t fancy taking too many risks with your investments, Debt Funds are your answer. Let us tell you why they are a good idea.   

  • Your investments are secured from the volatility of the equity market because you invest in Fixed Income Securities.
  • Debt Funds help you build a stable investment portfolio because they invest primarily in debt securities. These are more stable compared to equity investments.

Types of Funds

  • Open Ended Mutual Funds

An open ended Mutual Fund allows you to withdraw your money whenever you need it. However, your investment may be subjected to an exit load.

  • Close Ended Mutual Funds 

A close ended Mutual Fund has a defined maturity date.

We’ll give you an insider tip:

Although some Mutual Funds have a minimum lock-in period of 3 years, it is advisable to remain invested in the scheme for at least 5 years. This is because Mutual Funds record higher returns over a longer term. You can even choose to continue your investments for more than 10 years to enjoy increased returns.

What is an Equity Scheme?

The main objective of an Equity Scheme is to offer growth of capital.

Why should you invest in Equity Funds?

Equity Funds give you high returns but have a moderate to high risk attached. This is because these funds are linked to the market volatility as they are invested in shares.

What is the most popular way to invest in Equity Funds?

The most popular way to invest in Mutual Funds is through Systematic Investment Plans. Here’s when and how to invest. When the market is low, you can buy a higher number of units of a fund and while the markets are riding high, you can buy a fewer number of units. This is called rupee cost averaging. With rupee cost averaging, the highs and lows of the market work in your favour. The great thing about Systematic Investment Plans is that they help you to beat market volatility.

Is a lump sum investment a good idea for beginner investors?

Many investors who invest in Mutual Funds with a lump sum investment find that they need to be careful while timing their investments. If your timing goes wrong, you could end up with a significant loss. If you are a beginner investor, we suggest going the SIP way for starters.

Psst, have you heard these myths about Mutual Funds?

Make your life easier, use an SIP Calculator

To get you started with Systematic Investment Plans we have a handy calculator that can help you plan your savings goals. You can check it out here: SIP Calculator

Here’s how you should use the SIP Calculator

  • Decide how much you want to put aside every month. Use the slider in the calculator to select the amount.
  • Enter the expected rate of return on your savings.
  • Key in how much money you want to save.
  • The SIP calculator gives you an idea of how much time you will take to achieve your savings goal.
  • You also get a break-up of your total savings. The calculator tells you how much total interest you will earn, total tax paid and what is the principal amount you saved.

Let us give you an example.

Monthly savings: Rs. 5,000

Rate of return 12%

Savings goal: Rs. 3,00,000

The calculator shows that you will achieve your savings goal of Rs. 3,00,000 in 3 years and 11 months.

The profit that you will earn will be Rs. 66,113 and the principal amount you would have saved would be Rs. 2,35,000. Your total savings would be Rs. 3,01,113.

Want to save taxes?

Invest in Equity Linked Savings Schemes and choose to pay through an SIP. You can save up to Rs. 1,50,000 under Section 80C of the Income Tax Act.

Are you wondering which ELSS Funds to invest in? We’ll help you choose. Here are the Top 5 ELSS Funds for 2016.

Now that you are wiser about Mutual Funds, go ahead and start investing!


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Category: Mutual Funds

About Dheeraj Kapoor

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