An Easy Guide To Growing Your Money Through Mutual Funds

Mutual Funds and SIPs are the latest trends in investments. So why is everybody talking about this? Let us look a little closely at how these work.

I am an amateur investor in mutual funds and this article is my attempt in explaining to you in layman terms about the benefits of SIPs.

Mutual Fund basics

Units

When you invest in Mutual Funds, you buy them as units. Just like you buy 10gms of gold or a dozen apples, you can buy X units of a mutual fund.

NAV – Net Asset value

Just as the cost of 1gm of gold could be Rs.2700 or an apple could cost Rs.32, the price of every unit of a mutual fund is called NAV (Net Asset Value). This NAV changes every day depending on the market conditions. So for every investment, you would get X units depending on that day’s NAV. Similarly, when you redeem (that is close X no. of units in that fund or the entire fund), your units will be multiplied by that day’s NAV.

For example, when you invest Rs.10000 in a fund and that fund’s NAV that day is Rs.40, then you get 250 units (ie. 10000/40) of that fund. Then you invest another Rs.10000 in the same fund on another day when NAV is Rs.50. So you would get 200 units (ie. 10000/50) of that fund. So now you have a total of 450 units.

Redeeming the units

Now if you redeem the entire investment some months later and the NAV that day is Rs.100, then you will get 450×100 = Rs. 45000 (profit!). Or if NAV is Rs. 10, you will get 450×10 = Rs. 4500 (oops, bad time to redeem!).

Before you read ahead

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Investing in Mutual Funds

Generally speaking, there are two ways you can invest in mutual funds – lump sum or SIP.

Lump sum

Lump sum investment is nothing but investing a bulk amount on any day that you wish. There is no consistency here unless you personally enforce it.

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SIP

SIP is Systematic Investment Plan. It is a fixed amount that you compulsorily invest at a fixed frequency in mutual funds – generally, every month on a date(s) that you choose when applying for the fund. So if you choose to invest Rs.2000 on the 15th of every month in a scheme, then your linked bank account will be automatically debited for that amount every month, on the date you chose. Or you could give a bunch of post-dated cheques while applying for the fund.

Why SIP over lump sum?

There are a few reasons why SIP is strongly advised.

SIP forces savings

Your account will be auto-debited every month unless you canceled your SIP altogether. This will help you in following the more beneficial (Expense = Income – Savings) formula rather than saving only what is left after your monthly expenses.

The power of compounding

Every other investment like FDs, RDs and bank deposits have very poor returns post-tax. While SIPs in mutual funds not only have very good returns, they also give you the enormous benefit of multiplying your investment using the power of compounding.

Invest and forget

Not all of us are Warren Buffet. If we understood market trends or had the time for it, we would be in Goldman Sachs or JP Morgan.

You cannot keep track of the market regularly. SIPs help you invest money consistently and let you catch both the highs and lows of the market. This, when left undisturbed for a long time, averages out to multiply your earnings by many folds.

Real-Time Proof 

DATE NAV (Rs) AMOUNT (Rs) UNITS TOTAL
18-12-15 40.4389 10000 247.287 247.287
21-06-16 44.2321 3000 67.824 315.111
01-07-16 45.4892 4000 87.933 403.044
25-08-16 48.3639 4000 82.706 485.750
25-08-16 48.3639 5000 103.383 589.133
26-09-16 49.2369 4000 81.240 670.373
25-10-16 51.2325 4000 78.075 748.448
25-11-16 46.3535 4000 86.293 834.742
26-12-16 44.6846 4000 89.516 924.258
25-01-17 49.1198 4000 81.434 1005.691
27-02-17 50.7011 4000 78.894 1084.585
27-03-17 52.2523 4000 76.552 1161.137
25-04-17 56.2859 4000 71.066 1232.203
25-05-17 55.3880 4000 72.218 1304.420
27-06-17 55.9808 4000 71.453 1375.873
25-07-17 57.9665 4000 69.005 1444.879
28-08-17 57.6895 4000 69.337 1514.216

What you see is above is an illustrated example of investments in mutual funds. While a couple of entries are lump sum investments, the remaining are SIPs.

What I have done is  – I have chosen a real mutual fund with its real NAV values during the last 1 year. What I have assumed is the invested amount. As you can see, the lump sum investments are erratic as they depend on availability of funds whereas SIPs are regular. This fund’s NAV gradually increases until it sees a dip in November and December of 2016. But again it catches up to go higher. Over the course of this one year, investments in this mutual fund alone have seen a return of 26.91%!

That is the power of investing systematically.

Also published here.

Image source: pixabay

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About the Author

Rukmani S

I am a management professional working as a Product Marketer in an MNC. Coming from a typical Indian background, I have the mandatory Engineering and MBA degrees in my pocket. I love traveling, reading books read more...

6 Posts | 20,131 Views

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