Introduction to Mutual Funds
“The MF Industry’s AUM has grown from ₹ 24.54 trillion as on July 31, 2019 to ₹64.97 trillion as on July 31, 2024, more than 2 fold increase in a span of 5 years. “
-AMFI
What are Mutual Funds?
Mutual funds gather money from multiple investors to invest in various assets such as stocks, bonds, and other securities. Professional fund managers manage these funds to ensure they meet the fund’s goals and generate returns for the investors.
What sets Mutual Funds apart from other Investments?
Mutual funds effectively mitigate risk through diversification, strategically investing in various assets. This approach minimizes the vulnerability of individual investments and achieves diverse financial objectives, including long-term wealth accumulation, consistent income generation, and prudent savings management. The best part is that they make all this possible for a layman at optimal entry cost.
Types of Mutual Funds
Mutual funds are grouped based on what they invest in:
(A) Equity Funds: Focus on stocks suitable for gaining money over time.
(B) Debt Funds: Focus on stable income and lower risk.
(C) Hybrid Funds: A mix of stocks and stable income, offering a balanced approach.
(D) Money Market Funds: Invest in short-term stable funds with low risk and easy access.
India’s mutual fund industry has grown significantly, with more than ₹45 trillion in Assets Under Management (AUM) by 2024.
Ways to Begin Investing in Mutual Funds.
Systematic
Investment Plan (SIP):
An SIP allows you to invest a fixed amount regularly—monthly or quarterly—in a mutual fund. It’s an excellent option for those who prefer investing small amounts over time. The minimum starting amount is Rs.500/-
Why SIP?
Rupee Cost Averaging: SIPs help mitigate market volatility by spreading your investments over time. This means you buy more units when prices are low and fewer when prices are high, averaging the cost.
Discipline and Consistency: SIPs encourage regular investing, helping you stay disciplined and consistent in your financial planning.
Flexibility: SIPs can be started with as little as ₹500 per month, making them accessible to everyone. At any given time, when one wishes, one can Pause or STOP the SIP. Similarly, one can add a one-time TOP-UP amount along with the ongoing SIP.
Lumpsum Investment:
What is a lump sum investment? It involves investing a large amount of money in one go. It is suitable for those with a significant amount of idle cash and are comfortable with market timing.
Why Lumpsum?
Potential for Higher Returns: If the market is on an upward trend, a lumpsum investment can yield higher returns since the entire amount is invested at once.
Simplicity: Lumpsum investments are straightforward, without regular monitoring or frequent transactions.
Long-Term Growth: A lumpsum investment in a growing market can lead to significant wealth accumulation for long-term investors.