Investments and returns are two sides of the same coin. The primary goal of your investments is to earn substantial returns and one such instrument that helps you with that is Mutual Funds. A Mutual Fund invests money in various financial instruments such as stocks, bonds, company shares, etc, by pooling in money from several investors. The money collected is managed by an Asset Management Company (AMC) and the person who drives this investment vehicle is a Fund Manager.
Mutual Funds comes with two plans – Direct and Regular plans. The major difference between these two plans is that with Direct Plans an investor buys Mutual Funds directly from an Asset Management Company (AMC) and with Regular Plans an investor does the same through an intermediary (broker, advisor or distributor). Now, the question is why do you buy Regular plans when the same can be bought directly? With Direct Plans you get to earn 0.5% – 1.5% more returns than Regular Plans because:
- Expense Ratio – The Expense involved in a Direct Plan is lower. Unlike Regular plans, Direct Plans do not involve commissions that are to be paid to intermediaries.
- Returns – Since they have a lower expense ratio, Direct Plans provide higher returns.
So why miss out on Higher Returns? If you have invested in Regular Plans, it’s highly recommended that you quickly switch to Direct plans.
Speaking of returns, Mutual Funds are risky because they are linked to market conditions, but due to high risk, they also provide higher returns (returns more than traditional instruments such as FDs, RDs or PPF). The current interest rate for Fixed Deposits is anywhere between 4% – 8.5% but with Mutual Funds, an investor has the potential to earn returns of 15% or more.
Inflation is yet another important factor to be considered when it comes to investment and Mutual Funds account for it. The inflation rate in India for the past 10 years has been between 4% – 7%, which means that the returns earned minus inflation are higher when it comes to Mutual Funds when compared to FDs.
Now that we know Mutual Funds are the best option for investment, the often debated question is whether to invest in small amounts (SIPs) or lump sum in Mutual Funds. Systematic Investment Plans (SIPs) are a way of investing a fixed amount in a monthly/quarterly basis, whereas lump sum is a one-time investment in Mutual Funds. However, SIPs are more beneficial than a lump sum, let’s find out why?
- Systematic – SIPs inculcate the habit of savings by investing a fixed amount at regular intervals.
- Less Risky – With SIPs the money is spread over various intervals of time. This reduces your risk and protects your investment during times of market volatility.
- Rupee Cost Averaging – With SIPs you get the opportunity to hold more units. With SIPs the money is distributed during different phases in the market which means when the market is low, you get to buy more units. This gives the opportunity to sell high when the market is favorable.
“Risk comes from not knowing what you are doing.” — Warren Buffett