Navigating the World of Mutual Funds: The Benefits of SIPs and Diversification

Mutual funds are investment vehicles that pool capital from multiple investors to create a diversified portfolio of assets, including stocks, bonds, and other securities, which is managed by professional Fund Managers. Moreover, these funds offer the benefits of reduced trading costs and broad diversification, making them accessible even for smaller investors.

Mutual funds are typically categorised into equity, debt, and balanced funds, each catering to different risk appetites and financial goals. However, the value of a mutual fund is determined by its Net Asset Value (NAV), which reflects the performance of the underlying securities. Investors in mutual funds participate in the fund’s gains or losses, and the NAV is updated daily, providing liquidity without fluctuating throughout the trading day like individual stocks. Hence, protect investors form the market volatility.

What is a Mutual Fund?

A fund that is shared by many investors assembles a large pool of money and uses it to make a wide variety of investments, mostly in stocks and bonds.

Who is a Fund Manager?

Fund managers are professionals who manage the pooled funds from investors, allocating them into a diversified portfolio of assets like stocks and bonds. Their primary goal is to achieve capital gains or income while balancing risk and return. They ensure the fund’s performance aligns with its stated investment objectives, directly influencing its value.

Why Invest in Mutual Funds?

Accessibility: Mutual funds offer investment opportunities to investors of all sizes, starting from a few hundred rupees.

Professional Management: Experienced fund managers handle the portfolio, selecting investments based on detailed analysis to meet the fund’s goals.

Diversification: Mutual funds invest in a broad range of companies across various sectors, which reduces the risk linked with investing in individual stocks. This diversification allows investors to ease the risks without needing a large amount of capital.

Convenient: Mutual funds streamline the investment process with less paperwork and no direct dealings with brokers or companies.

Better Returns: They offer higher returns over the medium-to-long term compared to traditional investment options.

Cost-Effective: Mutual funds are a cost-effective way to invest because they leverage economies of scale, means the fund can cut costs by managing more money, which helps lower fees and could lead to better returns for investors. By pooling funds, they can negotiate lower brokerage, custodial, and other fees, passing the savings on to the investors.

Liquidity: Investors can redeem their units anytime at the current NAV or sell on the stock exchange for closed-end funds.

Flexible Plans: When investing in mutual funds, various investment and withdrawal options provide flexibility, allowing investors to tailor their strategies according to their personal financial goals.

Variety of Schemes: Mutual funds provide a variety of schemes designed to meet different financial goals over a lifetime, ensuring that there is something for everyone.

Regulated for Safety: Mutual funds are regulated by the Securities and Exchange Board of India (SEBI), ensuring that they operate within a framework that protects investors’ interests. Hence, the regular monitoring of mutual funds by SEBI adds an extra layer of security for investors.

What is a Systematic Investment Plan (SIP)?

Investing in mutual funds can be done through a Systematic Investment Plan (SIP). Instead of committing a one-time investment, you commit to investing small amounts over a period of time—typically every month.

Benefits of SIP

• Simple to Initiate

You can begin with only ₹500 monthly.

• Cost averaging in rupees

When you invest regularly, you buy many more units at lower prices and many fewer units at higher prices. This strategy can and does reduce the average price you pay for a unit over an extended time.

• Discipline

Through regular and consistent investments, SIPs help you develop a stable investment mindset.

Types of Mutual Funds

Various types of mutual funds exist, and each fulfils a distinct purpose. Here’s a simple breakdown:

How to Choose a Mutual Fund?

Choosing the right mutual fund can be a tough job. Here are some tips that might help:

• Understand Your Objectives

Are you putting money away for a house, a car, or your old age? Your goals will determine your decisions.

• Assess the Performance

Evaluate the fund’s performance over the last few years. Although past performance doesn’t guarantee future results, it serves as a reliable indicator.

• Comprehend the Charges

Each mutual fund has fees. Look for funds with lower fees, thereby allowing more of your money to remain yours.

Opening of Demat Account:

1. Select a Depository Participant (DP): Choose a DP like a bank or broker where you want to open a demat account.
2. Fill the Application Form: Complete the application form for opening a demat account, which will require personal details and identification documents.
3. Submit KYC Documents: Provide KYC (Know Your Customer) documents, including ID proof (Aadhaar, PAN card) and address proof.
4. Choose the Account Type: Opt for a demat account type (individual, joint, etc.) based on your preference.
5. Verification and Approval: After submission, the DP will verify your documents and process your account application.
6. Account Activation: Once approved, your demat account will be activated, and you’ll be able to hold and manage mutual fund units in demat form.
7. Link Your Bank Account: Link your bank account to your demat account for smooth transactions and redemption of mutual funds.

Investing in Mutual Funds:

1. Investigate Various Mutual Funds: Investigate various mutual funds and their respective performance histories.
2. Select a Mutual Fund: Select a mutual fund that matches your investment objectives.
3. Finish the KYC Process: Finish the KYC process to confirm your identity by offering required documents such as an identification card and proof of address.
4. Invest: Invest through a bank, an investment consultant, or the mutual fund’s official site to start your investing journey.
5. Regular Monitoring of Investments: Regular monitoring of your investments helps you keep track of how well they are doing.

Mutual Funds

SIPs

Indian investors can achieve long-term wealth creation through Mutual Funds and Systematic Investment Plans (SIPs). These reliable investment options can significantly increase savings over time. They offer a range of choices that cater to different levels of risk and return. Investors can select from various types of funds, including equity, debt, or hybrid, based on their comfort with risk. Although mutual funds and SIPs have underperformed recently compared to the market’s recovery post-Covid, this should not deter long-term investors. A closer look at the market indicates that these investment methods are still promising for building wealth.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.