“Never stand begging for that which you have the power to earn.” - Miguel de Cervantes
You work very hard to earn your money. What will you do with your money? Leave it lying in a savings bank account and earn 4% interest a year? No…you have to invest your money in a financial instrument, which gives you returns, much more than 4% a year. This is where you look at a very interesting financial instrument, called the Mutual Fund.
A mutual fund in India, is a financial instrument, which pools your and other investor’s money. This money is invested in stocks, if you opt for an equity mutual fund. The money is invested in treasury bills, Government Securities, Corporate Bonds and Money Market instruments, popularly called fixed income securities, if you opt for a debt mutual fund. Your money is invested in a mix of stocks and bonds, if you choose a hybrid fund.
Systematic Investment Plan also popularly known as SIP, is a very smart and also hassle free way, to invest in mutual funds. Unfortunately, many of our citizens think SIP is an investment by itself, while it actually is a way to invest in mutual funds.Want to be a smart investor? Just leave a missed call on IndianMoney.com financial education helpline 02261816111 or just post a request on IndianMoney.com website.
A mutual fund in India, pools and then invests your and other investor’s money, in stocks or bonds or even a mixture of both, stocks and bonds. The total investment made by the mutual fund, either in stocks/bonds, is then divided into units. You get units, based on the proportion of your investment (Cash you invest in a mutual fund). The value of the mutual fund, is measured by its Net Asset Value (NAV). This is the value at which you (investor), buy and sell mutual funds.
If you invest in an equity mutual fund, the fund manager invests your money, in stocks of reputed Companies. The equity mutual fund makes money, buying stocks at low prices and selling them at a higher price. Your returns depend on the stock market.Debt mutual funds invest your money in fixed income securities. You get lesser returns than equity mutual funds, but at a lesser risk.
Remember: You could also suffer a loss in your investment in an equity mutual fund, if the stock market crashes. Mutual funds come with a disclaimer:
“Mutual fund investments are subject to market risks. Please read the offer document, carefully before investing.” Invest in an equity mutual fund, only if you can take some amount of risk.
Systematic investment plan also known as SIP, is a method of investing in mutual funds. It is not an investment by itself. You invest a certain pre-determined amount, (amount you have decided beforehand), at regular intervals of time, in the mutual fund. This might be once each week, once each month or once in a quarter. SIP is a very good way, to save and invest for a bright future.
See Also: 3 Mutual Funds Myths
How do you invest in an SIP? Your money is auto-debited from your bank account. It is then invested in a specific mutual fund scheme, of your choice. You are given a certain number of units, based on the ongoing market rate, which is the NAV of the day.You can invest in equity mutual funds or debt mutual funds, through an SIP. When stock markets are high, the NAV of your equity mutual fund generally rises. You get less number of units of the equity mutual fund. When the stock markets fall, the NAV of your equity mutual fund generally falls. You get more number of units of the equity mutual fund. Since you are a regular investor in an SIP, the money you invest, fetches more units when the NAV is low and less units when the NAV is high.You can also invest in debt mutual funds, through the SIP. Investing in debt mutual funds through SIP, is just like investing in a recurring deposit.
See Also: When Should You Sell A Mutual Fund?
Slow and steady wins the race. Yes, SIP is a disciplined way to invest in mutual funds. Your money grows and grows. Before you realize, you are a millionaire.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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