Investing in mutual funds is quite common these days, and it’s partly because of how easy and flexible the investment option is. Once you have decided to park your money in this instrument, you can select the type of fund based on factors such as your risk tolerance, your financial goals, the fund’s performance, and so on. As a beginner, it might be prudent to reach out to a professional fund management service, who will consider these factors and guide you towards suitable funds.
However, if you’d rather invest directly on your own, you should know how to invest in mutual funds. These are the 2 most common ways:
- Making a lump sum investment
Have you been saving up for a long time and have a considerable corpus ready to be invested? In that case, the lump sum or one-time mode of investment is an option you can consider.
How it works: Let’s say you want to invest Rs. 1 lakh and have accumulated that much in savings over time. You can narrow down the fund of your choice and invest in a single go.
Who should do it: Lump sum investments in mutual funds attract a greater amount of risk, which is why it’s better suited for investors with a higher risk appetite and a long investment horizon. In addition, those who are experienced in mutual funds and understand market timing may be advised to opt for this method.
- Starting a systematic investment plan (SIP)
This is one of the more common and convenient methods of investing in mutual funds. As opposed to pouring in a large amount of money at once, SIPs allow you to stagger investments over a period of time at specified intervals in specified amounts. The plans can be on a weekly, monthly, quarterly, or even a bi-annual basis, depending on your comfort zone.
How it works: SIPs are similar to recurring deposits in the sense that you need to invest on a fixed schedule. Each time you put a predetermined amount into a SIP, a corresponding number of fund units are assigned to you depending on the scheme’s current NAV (Net Asset Value). With routine investments, the average cost of buying the units begins to drop below the NAV. This is known as rupee cost averaging. Combined with the power of compounding, this can help you earn higher returns over time while making you a more disciplined investor.
Who should do it: If you are just starting out in mutual funds, this might be the best way to learn about the market and grow your wealth. You can invest as little as Rs. 500 and work up from there.
Determining how you want to invest in mutual funds is as important as deciding where to invest. Bear in mind your risk tolerance and financial goals before making a choice. The Tata Capital Moneyfy App makes it easier for you to compare funds, select the right one for your needs, and start investing instantly!