With headlines saying lakhs of crores rupees lost within hours, the Stock Market can be a scary place for first-time investors. On top of it, a confusing maze of financial products and jargon associated with them makes it more unfamiliar for people used to simple instruments like bank Fixed Deposits.
It does not mean you cannot invest in Stock Markets. Now, you know you need the best Demat Account and Trading Account for this. You have stockbrokers helping with that. Why not hire a professional who invests money on your behalf? Enters Mutual Funds, a professionally managed fund that pools money from a group of investors to invest in the Stock and Bond Market for a small fee.
What is the best way to approach Mutual Funds if you are a first-time investor? The answer is a Systematic Investment Plan. It is a facility that lets you invest a small amount periodically, often directly deducted from your Bank Account. Why is this the best way to approach?
Induce financial discipline
Mutual Funds Investment is usually for a goal such asa child’s education, dream car, or down payment for that 3BHK flat you want. Most of these are long- or medium-term goals. To fulfil such a goal, you need to be disciplined invest regularly for an extended period. If you are the one who easily gets distracted or have a busy life, maintaining this discipline may not be easy.
SIPs induces that discipline without you even trying hard. Once you set up a SIP mandate, say for Rs. 5,000 on the 5th of every month, your bank directly sends the fixed amount to the fund house. In some cases, you must approve the payment every month once your bank prompts you to.
Rupee cost averaging
You may have heard that Stock Markets are risky. It comes from the volatile moves in the market. No one can confidently say how the market will perform in the future. A stock or an index jumps or falls up to 20% in a day. This, though scary, presents a juicy scenario for SIP investors. The volatility in the market provides rupee cost averaging.
Since you are unawareof how the market will be when your SIP gets debited, you end up buying in rising and falling markets, eventually averaging the cost of acquiring Mutual Funds.
Avoid mistiming markets
TheStock Market is highly volatile. If you invest in a lump sum or one go, you expose yourself to the risk of mistiming your investment. Think of a scenario. You want to invest Rs. 2 lakh today for the next five years. You find a suitable fund and put the entire amount. Your luck is weak, and as soon as you invest, the market starts falling.
By the end of two months, the market falls by 30%, and your corpus is nowRs. 1.4 lakh. Not just you lost Rs. 60,000 but also a chance to buy at a low.
Getting rich formula
Not everyone has Rs. 2 lakh to invest. Most of them who have a business or live on the salary can save just a portion of their income. This small part will not make you wealthy just lying in your Bank Account. Using SIP every month will help you compound your wealth effectively.
Compounding refers to earning interest on your investment and even on your interest earned, which usually gets reinvested. Just ensure you start investing as early as possible, even if it is a small amount.
Building emergency funds
Financial advisors say every person should have three to six months of household expenses as an emergency fund if you lose your job or fall ill for a long time. Investing a part of your savings every month in Liquid Funds can work as an emergency fund for a salaried person. Such fundsinvest money in short term debt and usually deliver better interest than your Savings.
Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, AppasahebMarathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.
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