Ways to Invest in Mutual Funds
If you are contemplating investing in mutual funds, there are two investment modes or approaches: the Systematic Investment Plan (SIP) and Lumpsum.
- 1. Systematic Investment Plan (SIP):Under a SIP, you will have to invest a fixed or predetermined amount regularly at pre-specified intervals. You can either invest a certain amount in one go every month or choose specific dates to make the payments. SIPs are suitable for those looking to expand their investments gradually without a substantial market risk.
As per the Association of Mutual Funds in India (AMFI), the SPI investments have hiked from INR 3,122 crore in April 2016 to INR 19,187 crore in February 2024.
For instance, you can start investing INR 5,000 monthly for up to 10 years to attain an investment value of around INR 5,00,000 at 12% returns. You can increase your SIP monthly investment amount as per your desired capacity.
- 2.Lumpsum:This method necessitates a one-time investment in mutual funds, which can be thought of as a hefty down payment. Although the lumpsum mode promises faster returns, it is touted to be riskier due to market uncertainties. For instance, you must invest a lumpsum amount such as INR 10,00,000, which requires a comparatively higher risk tolerance than SIPs.
Both mutual fund investment methods have their own benefits and challenges. To decide which one is ideal for you, consider your financial goals, risk tolerance, and investment prospects or capacity.
Types of Mutual Funds Based on Asset Class
You can explore varied investment options for mutual funds depending on their asset class and your risk tolerance. The following are the three primary categories:
- 1. Equity Mutual Funds :Generally, most investments made by equity mutual funds are in the business' stocks or shares. The primary objective is to achieve capital gains from these stocks. It makes them suitable for individuals with a higher risk-taking capacity and a prolonged investment period. Equity mutual funds can be classified as small-cap, mid-cap, and large-cap, targeting companies with varying market capitalisations. Equity mutual funds can generate significant profits but experience greater price fluctuations than other investment types.
- 2. Debt Mutual Funds :These types of mutual funds strategically disseminate the assets into securities with fixed income. The debt mutual funds comprise corporate debentures, bonds, and government securities. You can reap the benefits of regular income via interest-based payments. These funds are valued for their lower risk quotient compared to equity funds. The debt mutual funds are appropriate for investors seeking consistent returns with less risk. Since they have high liquidity, you can prefer them for achieving short to medium-term financial targets.
- 3. Hybrid Funds :These types of mutual funds combine the strengths of stocks and bonds, creating a balanced investment strategy. These funds are carefully curated to manage risk while increasing the potential for returns. Hybrid mutual funds offer investors the opportunity to diversify their portfolio across different types of assets. These funds are divided into sub-categories like conservative, balanced, and aggressive hybrid funds. Each fund type allocates your investments between bonds and sticks, offering a mixture of growth and stability.
- 4. Money Market Funds :These include commercial paper, treasury bills, and certificates of deposit. Money market funds are short-term investments with more liquidity and less risk.
- 5. Index Funds :These funds imitate the performance of a particular market index, such as the Nifty 50 or the S&P 500. Index funds contain lower expense ratios and facilitate portfolio diversification, too.
- 6. Sector Funds :These funds are concentrated on specific industries or sectors like healthcare, automotive, energy, technology, etc.
- 7. Gold Funds :Under gold funds, one invests in physical gold or assets like gold ETFs. Such funds provide exposure to precious metals and can be hedged against economic fluctuations.
