“Start Early, Invest Regularly, Remain invested for long-term”.
This is one of the most popular concepts with respect to investing in mutual funds.
In this article
- How early can you start investing?
- Benefits of investing in mutual funds
- Is the SIP amount always fixed?
- How will you finalize the funds you want to invest in?
- Will Rs 500 per month make any difference over the long term?
- How will you start?
How early can you start investing?
An investor can typically start investing with as low as Rs 500 per month in a mutual fund, by opting for Systematic Investment Plan, which is similar to a recurring deposit of a bank.
The amount and the date on which it should be deducted is fixed by the investor and units based on the current NAV is credited to the investor’s account.
Over time, you will start to see the benefits of rupee cost averaging and compound interest.
Benefits of investing in mutual funds
1. Rupee cost averaging
With regular investments at a fixed interval, we see that the investments get balanced in relation to market volatility. This phenomenon is called Rupee Cost Averaging.
In other words, it means buying few units at a higher rate while the market was is in an up-trend and buying few units at a lower price when the market is in the downtrend, so as to ensure the average buying price is not very wary off the lows and/or highs.
2. Compound interest
The interest you earn on your unit gets re-invested, thereby enabling you to earn compound interest on the re-invested amount.
For example, you have invested Rs. 500 in a mutual fund. One year later, the money increases to Rs. 550, this amount will again be invested in the fund and the next return you receive will be on Rs. 550 and not Rs.500.
In case of equity funds, whenever capital appreciation occurs and the fund managers sell stocks to book profit, that profit is re-invested in buying more stocks to enable higher return.
Thus, the earlier you start, your money gets more time to multiply
Is the SIP amount always fixed?
SIP amount is not fixed at Rs. 500.
As an individual’s income grows with time, he/she can either invest in new schemes or add a top-up to the existing scheme (increasing SIP amount every year is known as Step-up SIP).
In many cases, fund houses allow additional purchase for an amount as low as Rs 100, thereby, helping small retail investors avail the benefit of flexibility.
How will you finalize the funds you want to invest in?
Depending on your risk-taking ability there can be three types of SIP mutual funds:
1. Growth funds
If you are willing to take risk, these funds are for you.
These funds primarily invest in equity and equity related instruments.
They typically generate high returns compared to any other fund across the asset class. These funds are only suited for long-term investors with an investment horizon of more than 10 years who have a high risk-taking ability.
2. Balanced funds
These funds have a moderate risk when compared to the equity counter-part. They invest in both equity and related instruments and debt instruments. While the equity portion provides capital appreciation, the debt portion moderates the risk profile. These are suitable for an investor who is not very aggressive when it comes to risk and typically invests for 3-5 years period.
3. Fixed income funds
These funds are mostly debt funds that invest in fixed income instruments of varying maturity/duration.
These funds generate returns from the underlying securities. These are less risky and are suitable for risk-averse investors or for investors looking for short-term investments, particularly less than 3 years.
Some notable funds in each category are as follows.
Click on each of the funds to check their profiling, pros, and cons.
- Aditya Birla SL Frontline Equity Fund
- Kotak Standard Multicap Fund
- Reliance Small Cap Fund
- Motilal Oswal Multicap 35 Fund
- HDFC Balanced Fund
- Aditya Birla Sun Life Equity Hybrid ’95 Fund
- ICICI Prudential Equity & Debt Fund
- Franklin India Low Duration Fund
- L&T Low Duration Fund
- BOI AXA Ultra Short Duration Fund
Will Rs 500 per month make any difference over the long term?
Let us assume A and B make an investment of Rs 500 per month and Rs 1000 per month respectively, buying the same fund.
While A started investing when he was 20 years old, B started investing when he was 35 years old.
Both A and B planned for 30 years and 15 years respectively with an aim to get the corpus when they turn 50 years old. Let us see the amount accumulated after the tenure:
With expected returns of 12% per annum, person A who started early was able to generate nearly 10x of the amount invested.
Despite investing the same amount, the amount accumulated differed significantly by 3x. This very well shows how investing early, matters the most, irrespective of the amount.
Even a small contribution of Rs 500 per month can help you accumulate more than a million rupees.
How will you start?
We believe with multiple trading portals and smartphone apps coming to light, investing is becoming increasingly simple.
Applications such as Groww, which is available in both iOS, and Play Store provide a simple platform to invest, which is backed by technology and data, thereby enhancing transparency.
Investing has become exceptionally simple these days, with the advent of technology. All you need to have is a mandatory PAN, Aadhar card and fill up a KYC and you will be good to go!
Should you wish to start your investing journey, feel free to connect with us.
Disclaimer: The views expressed in this post are that of the author and not those of Groww