Various Modes of Investing in Mutual Funds
Apart from offering different investment options to investors, mutual funds offer various modes of investing in mutual funds as well.
Popular modes of investing in mutual funds are:
- Lumpsum or one-time investment
This mode helps to invest all your investible surplus at one go. They attract market risk. Thus, you should invest in mutual funds via lumpsum only if have a high-risk profile. The lumpsum investment could be rewarding if the long-term o the economy is positive. This mode of investment is more suitable if you anticipate high returns while being exposed to high risk. Alternatively, you can invest in low-risk options such as liquid funds where the liquidity is high but returns are significantly low.
- Systematic Investment Plan or SIP
This disciplined mode of investment aids to multiply wealth effectively without parking all your savings in a single asset at a given time. Under this method, an investor chooses a mutual fund scheme according to their investment and financial goals. They regularly invest a fixed amount in these schemes in fixed intervals. The periodicity can be daily, weekly, monthly, quarterly, semi-annual, or annual. The SIP investment amount can be as low as Rs500 per month.
Let’s understand how SIP works with the help of an example.
Let’s say your monthly salary is Rs40,000 and you set aside 10% for your monthly SIP mutual fund investment. So, you invest Rs4,000 per month in ABC fund from March 2005. One of the key advantages of SIP investment is the power of compounding it offers. The Rs4,000 that you regularly invest in mutual funds online accumulates over the years to form a substantial corpus. Between March 2005 and March 2015, you would have made 120 investments of Rs4000 each into the fund. In March 2015, the total of the principal invested would be Rs4.8 lakh (120*Rs4,000).
If you calculate the return on this investment at 12%, the corpus would have grown to Rs9.3 lakhs, almost double your original investment. (We took 12% as the assumed rate of interest since investments in SIP offer an average return of 12-14% over the period of 7 to 10 years).
Even if you adjust this rate of return against an assumed inflation rate at 6%, your wealth would grow to Rs6.6 lakh in this period, i.e. a nearly 50% appreciation of the capital invested.
- Systematic Transfer Plan or STP
If you have a significant amount but don’t want to invest via Lumpsum mode or SIP mode, then this is the ideal mode of investment in mutual funds. Under STP mode, you gradually invest a large corpus in your preferred asset classes. STP is an advanced option of SIP investment. But unlike SIP, the investor initially invests in risky securities such as liquid funds that have the potential to offer better returns. The investor systematically or gradually transfers a certain amount to another scheme which might be an equity fund of the same fund house.This mode of investment is relatively safer than Lumpsum mode and has greater potential to provide higher returns than SIP. Just like SIPs, STPs also provide you with the benefit of Rupee Cost Averaging. Thus, STPs provide you with the best of both worlds of Lumpsum and SIP.
No matter the investment mode chosen by you, you are bound to be offered all the benefits of mutual funds.Always align your mutual fund investments with your financial goals, risk profile and investment horizon. Happy investing!