Mutual Fund is a vehicle through which you can invest in the stock market. It’s just like hiring a professional driver when you don’t know how to drive a vehicle.
SIP is the best way to start investing in a mutual fund if you investing for the first time.
You can invest in mutual funds even if you don’t have any knowledge about the stock market. You should look after information regarding mutual funds and basic analysis which I have discussed here.
You can also invest through PMS (Portfolio Management Services), but they charge too high compared to mutual funds. PMS only provide services to high net-worth investors. Generally, the minimum investment amount to take PMS services is 10 to 25 Lakhs.
Benefits of SIP investment
You can invest in a disciplined through mutual funds because of the magic of automation.
You need not to manually transact every month to invest in the mutual fund. Every month a fixed amount will be debited from your account once you start SIP.
Easy and convenient
It is an easy process to start investing in mutual funds. Once you complete your KYC(Know Your Customer) and other basic documentation processes, you can start investing.
Rupee cost averaging
As you are investing regularly, you may have invested when the market was high and low. So your cost of investment will be averaged out.
You can’t select more than 2 to 3 stocks if you are investing a small amount every month by yourself in the stock market. Mutual funds have a huge sum of money and they invest in 10-30 stocks, even if you have less money your investment will be diversified. Mutual funds protect downside risk due to diversification. Because of diversification, your return will not be negatively impacted even if one stock falls sharply.
Drawbacks of SIP investment
Past performance may not guarantee future returns.
You can check past returns to see whether mutual funds have performed better or not. But in no way, it guarantees that the same return will be generated in the future as well. In the past, a fund manager was able to generate better returns compared to others. But in the next year, he may provide lower returns or negative returns.
Some mutual funds have high expense ratio up to 2.5%. So your corpus may be reduced due to high fees. I have given an example of how expense ratio can reduce your corpus in this article ahead.
Mutual Fund will be investing in the market on your behalf. You will not have any control of which stock they are picking. Before starting SIP you should look at the portfolio of the fund.
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How to select a mutual fund for SIP investment
Before understanding how to start SIP, you should know in which scheme you want to invest.
You can check the following websites for selecting mutual funds:
There are many other websites available for analysis. But I found these three websites to be most informational and reliable. Stick to one or two sites only for your research.
You should analyse fund based on various parameters. There are screeners available in the sites to find out the best mutual fund for yourself. You can screen the fund based on its type, rating, return, period, etc.
You can select a mutual fund based on quantitative and qualitative analysis. I have discussed here both parameters.
Compare with benchmark
All mutual funds set their own benchmark and try to beat it. Large-cap equity fund will have a benchmark of Nifty or Sensex. While analysis, check whether the fund is beating its own benchmark.
Standard deviation describes volatility in performance. Its takes past returns as a base to calculate the standard deviation. If a fund is performing consistently then the standard deviation will be low. Standard deviation will be high if sometimes fund is generating high returns and sometimes very low.
The return you find on various sites is CAGR. CAGR stands for Compounded Annual Growth Rate. It is annualized return. A mutual fund may have generated a 10% return in 1st year and 15% return in 2nd year. Here, CAGR is 12.5%. 10% and 15% are calendar returns.
Check the returns given by the fund in the past 10 to 15 years. Don’t just check returns of only past 3 to 5 years. If some mutual fund has given a return of 30% in one year and 5% in the next year, don’t go with such funds. Look for consistency.
A fund manager is a key person who will be investing your money. Fund manager skills are very important for the success of mutual funds. Check the credentials and qualification of the fund manager. Also, check other funds managed by him and check the return of that funds also.
If the fund manager was changed recently past returns may not be relevant, as returns were generated by past manager’s skills.
Type of fund
You can select the type of fund based on the time period you want to invest.
If you want to invest for less than 3 years, you should invest at least 60% to 70% in a debt fund and rest in equity.
If your time period is more than 3 years, you go for 100% equity fund.
The fund with a longer track record
Select the fund which has a longer track record. I suggest going with the fund who have seen the 2008-09 crisis. You will be able to do more research if the fund has a long track record.
Fund size is total money received by a fund manager from all investors. More the size of the fund better it is. Select the fund with more size. As the size of the fund increases, the expense ratio of fund reduces.
You can also read fund factsheets. Fund factsheets are issued by funds providing information about fund performance and other details.
Based on mutual funds selected here is the process to start SIP.
There are two ways to start sip investment
You can start your SIP in mutual funds directly without any intermediary party in between. You can invest through direct plan either by visiting their site or visiting their office.
I will suggest you to visit their office once, if you are investing for the first time.
They will tell you everything about their schemes and process to start investing. But don’t just rely on information provided by them. Do your own research before starting SIP in a specific mutual fund. If you don’t have time to visit the nearest office, you can invest through their website.
Setting up a mutual funds account is as simple as any other account opening.
You can invest directly through their website.
Follow these steps you have selected mutual fund you want to invest in it:
As per SEBI, you should be KYC compliant before you start investing.
Keep ready following document:
- PAN card
- Aadhar card
- Address proof(driving license or other documents)
- Passport size photo
- Bank statement
You can open an account and complete your E-KYC. But E-KYC has some limitations. As per RBI, the large transaction cannot be done with only E-KYC. In that case, you need to go to the fund office and complete the process.
You will be required to fill the form for auto-debit from your bank account or just connect the account with a mutual fund.
Now Mutual funds are also having their own apps. So you can invest by downloading their apps.
Investment can also be made through apps like Groww, Karvy, Kuvera etc. They don’t charge any fees for this. The process to start SIP through such apps is also same and mentioned above.
You can also invest by visiting mutual fund office.
Contact representative of a mutual fund. You can get there phone no. In their website.
Fill KYC form(if you are not KYC compliant through their website)
Provide other necessary information like Name, address, PAN, email id and phone no.
Attach a copy of required documents along with the form. Submit cheque or DD of the amount you want to invest now.
You can either provide post-dated cheques or give auto-debit instructions to the bank.
Once you complete this process, SIP will be started on the date fixed.
2. Regular plan
In the regular plan, you will invest through an agent or broker. All your work of KYC and other compliance will be looked after by them.
In a direct plan, the process becomes tiresome. You can invest through regular plan if you don’t want to get into the process of registering and other documentation processes.
You can invest in a regular plan through an agent or bank. Banks are also providing these services. But they would charge extra fees for it.
You can also invest through Demat account. Stockbrokers provide these services to invest in a mutual fund. But they charge for these services.
Difference between direct plan and regular plan
After going in detail of how to invest in both ways, let’s understand the difference between both.
You can invest in the same mutual fund either by direct plan or regular plan.
Through the regular plan, you are just investing through an agent, bank or broker. They will charge nominal fees for it.
All the process will be handled by them. They will charge certain fees for it.
It will not be charged directly. Charges will be the difference between the expense ratio of the direct plan and regular plan.
In the table below, you can see the difference between an expense ratio of both the plan.
Table showing the expense ratio of both the plans
|Fund Category||Regular Plan||Direct Plan||Difference|
Source: Value Research, Data as on March 31, 2019.
Difference between both the plans looks very nominal. But when you invest for a longer horizon, the difference between corpus you get is huge.
For example, if you invest in equity fund Rs. 5000 monthly for 30 years at 15% CAGR.
Through the direct plan, Investment after 30 years is 2,20,30,051
Through the regular plan, investment after 30 years is 1,87,55,347
The difference in corpus between regular plan and direct plan: 32,74,704.
If you invest directly, you can save up to 32Lacs after 30 years. Although you will be required to do documentation and process by yourself, it’s worth.
From the above facts, you can take your call.
Now as you are aware of benefits, drawbacks and analysis of mutual funds, you can take your call. Don’t think too much, JUST START. Starting will take you somewhere or you will be nowhere. Be disciplined and invest for the long term.