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Mutual funds have become extremely popular in recent times due to the many advantages it offers. For example, mutual funds diversify risk, they take away the hassle of deciding what to buy and when to buy, they give you a wide choice and above all, mutual funds help you to meet financial goals.
There is generally a myth in the market that investing in mutual funds requires a lot of money to begin with. That is not correct. You can start with very small amounts and as your income grows, you can scale up your mutual fund investment size.
Here we will not get into detail regarding the process of mutual fund investing. The focus will be more on the methodologies and avenues available to you for investing in mutual funds. Here are 3 popular methods.
You can invest in mutual funds through new fund offers (NFOs). These are like an IPO in mutual funds where the fund collects fresh money from the public. This is normally done at a unit value of Rs.10. Mutual Fund NFOs keep coming out on a regular basis and of late NFOs of multi-cap funds and Balanced Advantage funds are extremely popular.
The second way is to invest lumpsum in any of the mutual funds of your choice. The fund typically offers continuous buying and redemption at a NAV linked price for all open ended funds. There are no upper limits on the amount you can invest when you buying from the AMC in lump sum.
The third way of buying is via systematic investment plan (SIP). Here you enter into an agreement with the fund to regularly invest a small amount on a particular day of the month. You give the mandate for SIP to the fund and on the SIP date, the fund automatically debits the bank and credits your fund account with equivalent units based on the NAV.
This would largely depend on your intent but here are some quick cues for you to look at the pros and cons of each of the methods.
Let us look at NFO investing first. Firstly, don’t believe that an NFO is cheap just because it issues units at Rs.10. That is a myth. Whatever price it issues units, the investment will be done in the current market and that will determine returns. However, NFOs have an advantage in that they give you access to new funds, new ideas etc.
Lump-sum investing is normally done by people who get a bonus or a fresh flow of funds. Most of the corporate investments are in lump-sum form. Here there is no upper limit on investment. However, when you invest in lump-sum, the timing of the investment matters a lot.
The most popular method among retail investors is the systematic investment plan or the SIP approach. This syncs with your income flows. It instils a discipline and above all, the SIP also give you the added advantage of rupee cost averaging which reduces your cost over time. For long term goals like retirement, education planning etc, this is the best approach.
The minimum investment permitted will vary from fund to fund. However, there are some broad practices that are followed by these funds. Here is a quick take on the minimum investment involved.
In the case of new fund offers (NFO), the AMC normally fixes the minimum investment at Rs.5,000 per application. This is done more from the point of getting economical units of application. This is the norm in most of the cases. However, the minimum investment tends to be higher for debt funds.
In case you are buying in lump-sum, the normal minimum investment is Rs.5,000. However, the fund houses only insist on this for the first investment. Subsequent investments can be as low as Rs.1,000 also. This is the standard practice followed by most of the funds.
With regards to SIP, the minimum investment is Rs.500 per SIP deduction. For example, if you are doing a monthly SIP, you can apply for a monthly deduction as low as Rs.500. Some mutual funds even offer SIPs as low as Rs.100, but the general practice is to insist on Rs.500 as minimum investment for SIPs.
Are there any maximum investments for mutual funds. Normally, no upper limit is prescribed. However, in case of investing in ELSS (tax saving) funds, you must remember that tax deductions under Section 80C are only available up to an investment of Rs.150,000 per annum. However, your investment can still be above that figure.
It actually could and the trend is already visible. For example, some funds are offering daily and weekly SIPs with much lower investment requirements. Similarly, mutual fund industry has tapped into the rural sector by introducing micro-SIPs that have a minimum SIP amount of Rs.100. This allows these spread out investors to invest in regulated entities and keep their money safer.
However, before opting for an NFO, lump-sum or SIP, it is always a good idea to sit with your financial advisor and start with a methodical plan.
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