Now that you know what mutual funds are, you have probably decided to invest some money in a mutual fund. How would you go about doing it? The first thing is to open a mutual fund account that you can use to make investments. It is very easy to open this account. You can contact your bank or a financial company, they will help you do it. You need to provide documents like PAN card, address proof, etc. and your account will be opened. You can link the account to your bank account so transfer of money can be done easily.
Instead of investing a big amount at once, new investors can invest in a SIP. A SIP is a systematic investment plan. Here, you invest money every month regularly for a long duration. Let’s say you start by investing 2,000 every month. If you are happy with the progress, you can increase it to a higher amount. Once you select an SIP using your mutual fund account, every month money is automatically deducted and you get to buy mutual fund units. You would have heard of the saying – don’t put all your eggs in one basket. Similarly, don’t invest all your money in one fund. Spread it across two or three top performing funds. Every month on the date you have decided, the fund units would be purchased and transferred to your account. Let us see how this works.
Let’s say you buy HDFC Balanced Fund for Rs.1,000. Now the fund is sold in terms of units. The unit price is decided based on it’s performance. Assume the price is 100 per unit, which means for 1,000 you can get 10 units. Next month, the price may have risen to 110, in which case you get 9.09 units. So, now you have 19.09 units in your account. The value per unit is 110, which means your investment value now is 2,099.99. Not bad! You have earned almost 100 for the 2,000 you have invested in just a month. Now in the third month because of market fluctuations, the price may have dropped to 95. Don’t worry, the 1,000 you invest will get you 10.52 units. So, when the price drops you can buy more units. When the price goes up, your overall investment value increases. This is the benefit of investing in a SIP.
When you invest in a SIP, you are regularly investing money for the long term, 5, 10 or 20 years. This is a disciplined approach and discipline can help in reducing risks. Also, you would be investing in top-rated funds run by reputed companies. So, you can expect higher returns. Thanks to what is called ‘compounding’, SIP investments will earn you higher returns than investing a lump sum amount. In fact, if you invest 5,000 every month you may expect a reasonable return of 12%. In around 25 years, your investment can grow to 1 crore. Yes, 1 crore! You can become a crorepathi by regularly investing in mutual funds. All you need to do is set aside some money every month. Open a mutual fund account. Do some research on mutual funds to select the funds. Start an SIP and that’s it! Sit back, relax and watch your investment grow and create savings for you.