How to: Making your first mutual fund investment
Step-by-step guide into the world of mutual fund investments.
Let’s face it, talking about money and investments is not very fun. But the fact that you found the motivation and managed to bring yourself to read this article is commendable, kudos!
This article’s main aim is to give you all the information and tips you’ll need to get you to take the plunge and start investing. And one of the most important things to start something new, is motivation and we’re assuming that you possess enough of it to begin the journey. If you don’t think you have enough, then you can get some by reading “Why should you invest?” Once you’re done with that, you might want to go through “Mutual funds sahi hai?” to make sure you have all the info on mutual funds, required for a smooth investing experience.
Now that you have everything you need, let’s get started.
SIP?
SIP stands for Systematic Investment Plan. It’s an abbreviation and not the word ‘sip’, which refers to a mouthful of drink. It’s the most common mistake that people make, glad we addressed it first and saved you from sounding stupid in front of your friends.
So what’s an SIP?
It’s just a way of investing, where, instead of buying stocks or units of a mutual fund once, you purchase small amounts of them periodically, but for longer periods of time.
It’s the same as working out. If you want to get in shape, then you make sure that you work out consistently. Going to the gym for one day and doing all the hard exercises will only leave you injured and with a horrible experience, ensuring that you don’t think about working out for a long time. Along with consistency, sustainability is also key. Which is why, investments and workouts give great results when pursued in a consistent and sustainable manner.
“Great results?”
Yes, great results. Just hold on.
You’ve probably just started out, working and adulting, now you have to take care of your own expenses and manage everything month after month. And somehow you’re able to save some money at the end of 30 days. If you were just like any other 20 year old, you would’ve forgotten about the money and moved on, but you’re curious, and know that you can, with a little bit of effort, make that money grow.
So let’s assume that at the end of every month, by hook or by crook, you manage to save around ₹10,000, and that this goes on till the time you retire. To make the math easier and drive the point home, we’re not considering factors such as an increase in salary, change in expenses, etc. So we’re just assuming that you’re going to add ₹10,000, 12 times a year, for the next 40 years. With this calculation, you end up saving around ₹48,00,000.
Not very impressive, is it?
Now let’s imagine that you had an SIP, where you invested ₹10,000 every month and earned about 12% interest. Again, we’re imagining a world where nothing ever goes wrong, and more importantly, the markets keep growing over time. A perfect utopia.
In such a situation, the ₹48,00,000 that you invested via SIP for 40 years would turn into, wait for it, ₹11,88,24,203Rs.
Yes, read that number again.
No, you’re not reading it wrong.
You’re earning ₹11,40,24,203. Just by investing ₹10,000 every month.
Now, the markets will never be consistent, and a million things can, and will go wrong in 40 years, but still the difference between the gains from saving ₹10,000 every month and investing it remains very high. So even if things go wrong, your 48 lakhs still has a lot of room to grow in.
Which, honestly seems like a bet that you wouldn’t mind putting your money on.
Is it still unbelievable? It kinda is, right?
Use this calculator and see for your self.
Now you must be wondering how this is possible.
It’s simple, consistency.
By being consistent and investing periodically, you will be able to buy the units when the market is high, and low. So when the market is high, you’ll get fewer units, but when it’s low, you’ll get a greater number of them. So, over time, this will average out and ensure that do not over pay for securities.
The other thing is compounding. In our 8th grade math classes we would’ve studied about simple and compound interest, and learnt that compound interest always gave greater returns. This was because, in compound interest the interest earned was added to the principal and consequently allowed it to earn more.
And also with a SIP, you’re adding more and more money periodically and buying more and more units. This really gets the ball rolling and plays a big role in increasing the returns.
So an increase in principal due to periodic investments, coupled with reinvestment of profits/ dividends, the investment grows more and more with time.
No wizardry going on here. Just simple math.
What all would you need to get started?
- A bank account with online access.
- That’s it.
Two ways of investing in mutual funds-
You must’ve heard of a kind of bank account called Demat account. This kind of account is synonymous with investing, but, actually, not required for investing in mutual funds. Demat accounts are needed only if you want to invest in stocks, bonds, etc. If you happen to have a demat account configured then investing becomes very easy. These accounts provide a platform for you to buy, track, sell, and manage all your securities. So you can find and choose the mutual funds managed by various companies and even start SIPs or invest in them, all from one place. But the downside to this is that, the Demat providers charge a commission on the transactions and also maintenance fees. If you’re not aware of these then the costs can add up.
Instead, you can directly invest in mutual funds without a demat account. Every Asset Management Company (or AMC), for example, HDFC Asset Management Company, Mirae Asset Cash Management, etc.,which offers mutual funds has its on website. A platform which allows you to choose from one of their funds and start investing by just linking your regular bank account with it.
The only possible downside to this is that, if you invest in funds of different AMCs then it just becomes a little difficult to track your investments, as you’d have to log into various accounts to see how they’re doing. But nothing a quick excel sheet cannot solve.
Steps for investing in mutual funds-
Step 1- Identify a mutual fund
he best way to go about doing this would be to visit a website like moneycontrol.com and then go through all the mutual funds available.
While evaluating the funds, focus on the following parameters, listed in decreasing order of importance-
- Risk rating- directly proportional to returns
- 5 year returns- very important metric, you’d want a fund that has been consistent
- 3 year returns
- 1 year returns- this will tell you if the fund is currently stable or not
- Returns of the fund VS other funds of same type
- Returns of the fund VS Nifty/ Sensex’ returns- how the fund has performed compared to the market
- Asset under management (or AUM)- to get an idea about the size/ number of investors in the fund
- Mutual Fund’s portfolio- the stocks and securities it invests in
- And alternative funds
Step 2- Making an account with an AMC
Once you’ve chosen the fund, head on over to the Fund’s AMC’s website and sign up there.
For example, if you chose the Axis Growth Opportunities Fund — Growth then you google the fund’s name and you’ll come across the AMC’s page, in this case, axismf.com.
If this is your first time investing, then you would be asked to submit your KYC details. Every company has its own form and they’ll ask you to submit the details of your pan and Aadhar card along with a form. You’ll only have to complete this process once, as these details get linked to you Pan card, so the next time you make an account else where, your KYC would already be done.
Step 3- Ready, set, invest
Now all you have to do is, search for the fund on the AMC’s website and follow their steps to start investing in it.
But at this stage, you might notice that each fund has a few variations and carry different suffixes. Here’s what they mean-
Direct- This means that the you’re investing directly in the fund via the AMC’s website. This means that there will be no commission or brokerage that you’ll be paying to any intermediary. Greater gains.
Regular- You will choose this plan when you’re investing via an intermediary like a broker, advisor, or distributor. These intermediaries will take a commission from the AMC, which will in turn recover the costs from you. So you will incur relatively greater expenses. But the cost is justified if you’re new to investing and decide to proceed with the help of an advisor.
Growth- A growth plan will not hand out dividends, regular cash payments, but instead, it will reinvest that money to increase the Net Asset Value (or NAV) of your mutual fund units. What this means is that, if you and your friend held the same number of units of the same mutual fund, say 10 units of fund XYZ, but you have opted for a growth plan and your friend a dividend pay out plan, then, at the end of a year both of you would still hold 10 units, but your 10 units would be worth more as you chose to reinvest your divined money to increase the price of your units.
Dividend reinvestment- This plan is similar to growth, as it too reinvests the dividend. But, in this case the dividend money is used to buy extra units of the fund, instead of increasing the NAV.
Dividend payout- In this situation, you are simply handed the dividends from your investments In periodic cash payments. This is preferable if you require a constant source of revenue.
Once you’ve made up your mind about the fund and the kind of plan you want, just follow the steps and choose SIP or one time investment.
Step 4- Endgame
After you’ve completed the whole process there, you’ll have to make a transaction.
If it is a one time investment, then you’ll just have to make a transaction on the AMC’s site like you would on amazon.
Else if you choose an SIP, you’ll have to link your bank account to the AMC to allow for periodic investments, which happen automatically. After registering for the SIP, you will be given an URN number, and you’ll have to log into your bank account to add this SIP for automatic bill payment using the URN. Once this is over, you’ll just have to sit back and forget about it, as the payments to this SIP will happen automatically.
I mean, don’t completely forget about it, periodically track the fund’s performance and see if you need to move the money to another fund, or if it’s doing great then, relax.
That was a lot of info. It might’ve been overwhelming. But just follow the 4 steps and you’ll be golden, literally.
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Because, we understand the impact that the knowledge of a new tool or skill can have on somebody’s life.
And, financial literacy is one of those tools. It holds the potential, if harnessed, to change the entire course of a person’s life. Which is why we are working towards making the conversation around it more fun and engaging so that we can empower as many people as we can.
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