Plan your future through Systematic Investment Plan (SIP)

Back in 2008, Renuka, employed in a private company, ran into a mutual fund distributor. Offered the chance to join a Systematic Investment Plan (SIP), which involves a fixed monthly contribution, Renuka initially declined. She didn't have any money to spare. But, a friend guided her on how to save ₹500 a month.

Fast forward to 2024. Renuka's dedication to her SIP has paid off. She had been investing any extra money she had, even if the amounts were small. As the Indian stock market soared high,  Renuka's smart investments rose to ₹15 lakh. This impressive sum was built on a foundation of small, consistent savings – money that might have otherwise been spent on treats like chocolates and cutlets.

The power of mutual funds

Many people haven't yet discovered the power of mutual funds. These investment tools have the potential to transform small savings into significant wealth, growing your money into lakhs and even crores over time.

Experts are bullish on India's economic future, citing a powerful combination of factors. A youthful and increasingly ambitious population is poised to drive innovation and productivity. Additionally, favourable geopolitical conditions, a strong global economy, and a stable political environment are removing potential roadblocks to India's growth. 

As India's economy flourishes, exciting opportunities are emerging for everyday investors. By investing in equity-based mutual funds, you can harness the power of the growing Indian market and potentially build wealth for your future.

Mutual funds, a game-changer 

Many people stick with traditional investments like gold, bank deposits, and fixed deposits. While these options have their place, they may not offer the growth potential you desire.

Mutual funds can be a game-changer, especially for those new to investing. Here's why:

No stock market expertise needed: Unlike buying individual stocks, you don't need to be a market expert to benefit from mutual funds. Professional fund managers handle the investment decisions.

Diversification made easy: Mutual funds spread your investment across various companies or assets, reducing risk compared to putting all your eggs in one basket.

Access to a wider range of investments: Mutual funds can invest in stocks, bonds, and other assets, giving you exposure to different markets you might not be able to access on your own.

Growth potential: The goal is for the overall value of the fund to increase over time, which translates to profit for you when you redeem your shares (sell them).

In short, mutual funds offer a user-friendly way to participate in the potential growth of the stock market and other investment opportunities, even if you're a beginner.

NAV, the price per unit 

When you invest in a mutual fund, you don't buy individual shares of companies. Instead, you purchase units in the fund. The price you pay per unit is called the Net Asset Value (NAV).

Imagine a mutual fund that invests in various assets. The NAV reflects the total value of all those assets divided by the number of units outstanding. So, the NAV essentially tells you how much each unit is worth on a particular day.

Here's a simpler example: Let's say the NAV of a fund is ₹5. If you invest ₹100, you'll get 20 units (₹100/₹5 per unit).

Remember, the NAV fluctuates based on the performance of the underlying investments in the fund. If the value of those assets goes up, the NAV goes up, and vice versa.

Mutual funds are a great way to invest for the long term, regardless of your age or income. The earlier you start investing, the more time your money will have to grow. And by investing regularly and patiently, even those with small amounts of money can achieve their financial goals.

The magic of compound interest

Albert Einstein famously called compound interest "the eighth wonder of the world." This powerful concept allows your money to grow exponentially over time, and mutual funds can be a smart way to harness its potential.

Building wealth can feel overwhelming, especially with so many investment options available. But what if you could leverage the power of the stock market without needing to be an expert? That's where mutual funds come in.

A bouquet of funds

There are various funds to suit the different needs of investors. They are equity funds, debt funds, balanced funds, hybrid funds, and exchange-traded funds.

Equity funds: These are funds that invest investors' money mainly in stocks. The main objective of such funds is to return the maximum return to the investor for the money invested. Equity funds can be broadly classified based on their investment strategies.

• Large-cap equity funds focus on investing in stocks of well-established companies with a large market capitalisation. Market capitalisation refers to the total value of a company's outstanding shares.

• Mid-cap equity funds invest in stocks of medium-sized companies. These companies are generally smaller than those in large-cap funds but larger than those in small-cap funds. Market capitalisation is used to determine the size category.

• Multi-cap equity fund: These funds spread their investments across companies of all sizes, from large, established corporations (large-cap) to smaller, growing businesses (mid-cap and small-cap).

• Sector equity funds: Sector equity funds focus their investments on companies within a particular industry, like technology, healthcare, or energy. This approach can be appealing to investors who believe a specific sector has strong growth potential.

• Thematic equity funds focus on companies that are aligned with a specific theme or trend, like artificial intelligence, clean energy, or e-commerce. These funds offer a way to potentially capitalize on growing industries.

Debt funds

Debt funds primarily invest in fixed-income securities like government bonds, corporate bonds, treasury bills, and certificates of deposit. These securities offer investors a predetermined interest rate and return their principal amount at maturity.

Balanced funds

Balanced funds aim to balance between growth potential and income generation by investing in a mix of equity (stocks) and debt (fixed-income securities) instruments.

Exchange-traded funds

Exchange-traded funds (ETFs) are a type of investment vehicle that trades like stocks on a stock exchange. However, unlike stocks, which represent ownership in a single company, ETFs hold a basket of underlying assets, which can be stocks, bonds and commodities

How to get started

Mutual funds can be bought directly from companies or through intermediaries. Many intermediaries sell mutual funds. Mutual fund advisors, wealth advisors, banks, NBFCs, stock broking firms, and many more are there. If the services of such institutions are sought, ordinary investors will get personalized advice and guidance and help with paperwork and account setup.

Going online is trending. Online platforms are a popular choice, especially for younger investors, due to their ease of use and accessibility.

A fund's past performance may not be indicative of its future performance. If you're unsure about choosing funds that align with your goals, don't hesitate to seek professional guidance. A qualified advisor can help you navigate the options and create a suitable investment plan.

SIP, investing made simple  

A Systematic Investment Plan (SIP) is a fantastic way to invest in mutual funds regularly and conveniently. It allows you to invest a fixed amount of money at predetermined intervals, fostering financial discipline. Here are the different types of SIPs to consider:

Regular SIP: This is the most common type, where you invest a fixed amount at fixed intervals (monthly, quarterly, etc.). It's a great way to build wealth gradually through rupee-cost averaging, which helps manage volatility.

Top-up SIP (or Step-up SIP): This SIP allows you to increase your investment amount periodically, often annually. This can be a good strategy to keep pace with inflation and potentially grow your corpus faster.

Flexi SIP: This SIP offers more flexibility. You can invest a variable amount within a pre-defined range, allowing you to invest more when the market is low (potentially buying more units) and less when the market is high. However, this requires active monitoring of the market.

Trigger SIP: This SIP automates your investment based on pre-defined market triggers. For example, you can set up a trigger to invest a specific amount whenever the market dips below a certain level. This strategy can be risky and requires careful planning.

             (This was earlier published in the Malayalam business magazine, Dhanam)