Overview
A mutual fund is a form of investment in which an authorized fund house, such as banks and asset management companies, collects money from investors and trades in securities on their behalf, intending to maximize the profit ratio with the lowest risk.
The risk of market movement is reduced because the money is invested in different assets for different investment horizons. When the risk is reduced, a loss in one asset is offset by a profit in another asset in the portfolio.
The investment is done in shares, bonds, and commodities and is known as a portfolio for an individual investor. This portfolio is managed by a finance manager, also known as a fund manager.
SIP is similar to a mutual fund, but the investment is mostly made in lump sum form in mutual funds. Whereas in SIP, a small amount is constantly invested in the fund on a recurring basis.
With SIP, you can invest a minimum of Rs 500 every month or quarter. A fund manager is allocated to invest on behalf of investors in the market in various sectors, such as shares, bonds, and commodities. The aim of the fund manager is to maximize the profit while keeping the risk factor at a minimum.
One of the major benefits of investing in SIP is the power of compounding, where the interest earned on the principal value is reinvested. Over a period, investors yield a higher return of profit.
What are mutual funds?
A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.
Why do people buy mutual funds?
Mutual funds are a popular choice among investors because they generally offer the following features:
- Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
- Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
- Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
- Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.
Types of Mutual funds
How Does SIP work?
Once you apply for one or more SIP plans, the amount is automatically debited from your bank account and invested in the mutual funds you have purchased at the predetermined time interval. At the end of the day, you will be allocated the units of mutual funds depending on the NAV of the mutual fund. With every investment in an SIP plan in India, the additional units are added to your account depending on the market rate. With every investment, the amount being reinvested is larger and so is the return on those investments. It is at the discretion of the investor to receive the returns at the end of the SIP’s tenure or at a periodic interval.
When to Invest in SIP?
SIP investments can be started anytime ensuring minimum risk with the correct suitable scheme plan for the investor.
It is very important for the investor to choose the scheme which suits his long-term goals well. Hence, there is no suitable time frame within which an investor should start a SIP investment plan, the sooner the better.
Types of SIP
FAQs
SWP is a systematic withdrawal plan that allows you to withdraw a fixed amount of money from your mutual fund investment at regular intervals, like monthly or quarterly.
Missing a SIP installment won't be penalized by mutual funds.However, the bank may charge a fee for failing to make the auto-debit payment. A mutual fund will only terminate the SIP after three consecutive missed payments. Even if you miss payments, your current investments will continue to generate income.
Mutual fund rating is a measure of a fund's performance and is assigned considering its historical risk and returns performance while comparing it to other funds in the same category. Mutual funds are rated by independent agencies like CRISIL, Value Research, Morningstar etc.
Investment in SIP is recommended for an investor who can regularly invest in smaller amounts of investment.
Mutual funds are more beneficial than SIP for higher returns and profits, where the return is gradual over a long period.
For the long term, SIP is a more preferred form of investment due to compounding interest.