How To Start An S.I.P. in Mutual Funds?

All of us have been there, haven’t we? Somebody talks about Mutual Funds in such a convincing way that we end up thinking it is the safest way of investment there could ever be! Or we see an advertisement that presents Mutual Funds Investment in a way that makes it seem like it is the solution to all our financial problems. All this while, we are left wondering what these Mutual Funds actually are or how they work. If you are one of the many people who face this problem, then you are in the right place. In the following article, we shall discuss what Mutual Fund Investments are, how to start an S.I.P. in Mutual Funds, what are some common mistakes and how to avoid them, all in a very simple, yet informative manner.

What is a Mutual Fund S.I.P.?

First, let us see what Mutual Funds are. The simplest way Mutual Funds can be described as “Instruments of collective investments”, that is, they are a way through which a lot of people can pool their money together and invest in a single portfolio. 

Now, you might ask why develop these instruments of collective investments when one can simply invest their money in securities of their choice. The answer lies in the word - “Portfolio”. 

• A portfolio is made up of a very large number of securities and it is made in order to avoid investing all your money in 1 or 2 securities. Just like it is said “Do not put all your eggs in one basket”, it can be said, “Do not invest all your money in one stock, in one sector, or one group”. 
• Investing your money in stocks of various companies from various sectors in addition to investing some of your money in fixed-income securities minimises your losses because in case some stocks underperform, others can make up for the loss. Further, a minimum return and liquidity are maintained by investing in fixed-income securities. This investment in various securities is called Diversification. 

The reason a collective investment is required is this diversification across a large number of securities can not be done with small investments. To make this affordable to the general public, it is structured in such a way that many investors can contribute small amounts to reach a large investment amount.

Now that you know what Mutual Funds are, let us see what S.I.P. means. A Systematic Investment Plan is nothing more than one of the many ways of investing your money in an investment scheme. Systematic simply means that the investor invests some amount of money in the scheme at regular intervals. If you want to read about S.I.P.s in more detail, you may read the following article [Link to the article “Top SIP Investments Under ₹20,000 in India”]

How To Start An S.I.P. in Mutual Funds

Let’s take a look at the steps you must follow if you want to start a Systematic Investment Plan in a Mutual Fund.

Step 1: Documents

Know what documents will be required to start your S.I.P. in the Mutual Fund of your choice. Generally, you will require an ID Proof such as an Aadhaar Card, Proof of address (Passport, Driving License etc.), PAN Card, and Bank Account Details but it is always better to check the website of your Mutual Fund of choice.

Step 2: KYC

KYC is the government’s way of doing a background check on you in order to prevent fraud, money laundering and other financial crimes. You can get your KYC done both online and offline.
For an offline KYC Promise, A KYC Form needs to be filled out which can be downloaded from the website of the fund companies, AMFI or RTAs. This form is then submitted to the Fund House’s Office or RTA.
For the online process, an online form can be filled which is available on the website of the fund companies, AMFI or RTA.

Step 3: Get Registered

The third step is to register yourself with an Indian Mutual Fund broker or a financial institution of your choice. After registering, you may choose the investment scheme of your choice.

Step 4: Choosing The Correct Scheme

Choosing which scheme you want to invest in is a personal decision and every investor will have a different scheme that fits their goals and conditions. There is no “One size fits all”. You must take into account the risk that the investment scheme carries and whether your appetite can bear it or not, what the gains announced by and projected by the scheme are and whether your goals can be satisfied with them, if the fund is open-ended or close-ended, whether it is a short term fund or a long term fund and many things more. The mistakes that must be avoided while choosing the right scheme for yourself will be discussed in the next section but if you find this decision too overwhelming and confusing, we at InsuranceDekho are always here for you and just a call away.

Step 5: Investment Amount

Not every investor can invest the same amount of money. Some may have thousands of rupees to invest, some might not have more than a few hundred. It is important that before submitting your form, you determine the amount you will be investing in your mutual fund scheme at regular intervals.

Step 6: Date of The Systematic Investment

Since you are investing in an S.I.P., you will be investing money regularly. It may be monthly, quarterly or weekly. In most cases, the amount will be deducted automatically from your bank account. Hence, it is very important that you choose the date of your systematic investment based on your personal cash flows.

Step 7: Submit Your Form

Once you have determined the above factors and chosen your Mutual Fund Company, you can start your S.I.P. by submitting the form available on their website. 

Common Mistakes and How to Avoid Them

1. Investing Without Objective

With everyone around you investing in Mutual Funds, we understand that you might be tempted to invest just for the sake of it or due to the fear of missing out. However, this might end up proving counterproductive as a lack of a clear objective might translate to failure in determining the following factors properly. 

2. Lack of Research About The Mutual Fund Scheme

There are various angles from which you have to look at a Mutual Fund in order to assess it and decide whether it is the right one for you or not. Failure to carry this assessment out may result in a lot of mistakes, some of which are mentioned below:

1. Not assessing the risk factor: Different investment schemes have different levels of risk. If you do not research properly, you might end up investing in a high-risk scheme even though your appetite might not be okay with it.
2. Not seeing if it is open-ended or closed-ended: Closed-ended schemes do not allow you to withdraw money before the end of the mandate period. If not taken into account, someone who plans to withdraw money when wanted might end up choosing a closed-ended scheme since they typically offer higher returns.
3. Conflict of Interest: These might arise if the investor does not take a proper look at the investment portfolio of the Investment Scheme. For instance, a person who follows a vegan ideology may end up investing in a Mutual Fund that has meat or dairy companies in its investment portfolio, or a Muslim investor may invest in a Mutual Fund that earns dividends by investing in alcohol companies or conventional banks.

3. Copying Other People's Investment Strategy

 This is a point we have iterated in our articles, that there is no “One Size Fits All” when it comes to Mutual Funds. Just because a scheme works well for your friend, does not mean it is the right Mutual Fund Scheme for you too.

4. Burning Out

It is not rare for beginners to have unreal expectations about the returns Mutual Fund Investments can fetch. But, when these expectations are not met, many investors become disappointed and stop investing altogether. Keep in mind that good gains are always earned in the long run in the capital market.

Frequently Asked Questions

Ques 1. Can S.I.P. be started online?

Ans. Yes, although the offline option is also available, S.I.P.s can be started and maintained from the comfort of your home.

Ques 2. What is the minimum amount of money I need to invest to start my S.I.P.?

Ans. Typically, Mutual Fund Investments can be started from as low as just ₹500. Some schemes even allow ₹100. It depends on the scheme at the end of the day. You will have to check the website of the scheme you are researching.

Ques 3. Are there Mutual Funds that do not invest in interest-bearing securities?

Ans. In today’s date, there are mutual funds structured to accommodate all kinds of goals and requirements. Hence, if an investor wants to invest in only equities, one can find Mutual Fund Schemes that invest purely in equities.

Ques 4. What if I miss an S.I.P. Installment?

Ans. Although the way schemes are structured, the S.I.P. installment is charged from your account automatically on the date set by you. However, if due to any reason, you end up missing an installment, your S.I.P. will not be cancelled. Missing three consecutive installments, however, will result in your S.I.P. getting cancelled.

Ques 5. Can I pause my S.I.P.?

Ans. Yes. If you face unforeseen circumstances, you can pause your S.I.P. This is better than cancelling your S.I.P. as even if your S.I.P. is restarted after pausing, you can continue on your investment journey when you are ready. Cancelling it altogether, however, you have to register from a new end.