When Should You Start Investing In Mutual Funds?

They say, better late than never. And to some extent that is true. When it comes to investing, it all depends on what your financial goals are and what you wish to achieve financially. Are you investing to financially secure your post retirement years, or are you investing to secure your child’s future? Or do you have short term goals like buying a car or renovating your house? When you have a defined set of goals, it helps you in formulating an investment strategy that may hold the potential to help you attain financial stability. The financial market is packed with plenty of investment schemes that cater to the needs of almost every individual. Every financial scheme carries a different risk profile and as an investor you too should be able to understand your risk appetite before investing your hard earned money in any scheme.

A risk appetite is nothing but an individual’s ability to risk his or her finances in an investment scheme with the hope of making some capital gains. Individuals with zero risk appetite generally settle with conservation investment options that offer low fixed interest rates. However, if you are someone who is willing to go the extra mile and invest in tools that offer high risk rewards ratio, you may consider investing in mutual funds.

This article focuses on mutual funds and when one may start investing in mutual funds.

What is a mutual fund?

According to SEBI, the regulatory body of mutual funds in India, a mutual fund is “Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds in equity and other money market instruments like, debt, G-sec, T-bills, government securities, corporate bonds, etc. The money is invested across the Indian economy and the allocation of assets depending on the risk profile and investment objective of the scheme. Mutual fund holders receive shares in the form of units. They are allotted units in quantum with the money invested and depending on the existing net asset value

(NAV) of the scheme.

When you should start investing in mutual funds?

If you ask us honestly, there is no right time to invest in mutual funds. A lot of people feel that they should wait for the market to stop fluctuating and then they should invest in mutual funds. But timing the market is almost impossible even for seasoned investors and hence, the earlier you invest the better it is. If you have long term financial goals like building a retirement corpus, we suggest that start at the earliest. Because to build a retirement corpus one may need at least 25 to 30 years in hand and hence, they need to start investing at the earliest. The more time you can give your investments to grow, the more chances you have of overcoming inflation and benefiting from compounding. Also, with mutual funds like equity funds, it is better to keep a long term investment horizon. That’s because equity mutual funds tend to perform only when one remains invested for the long run.

You can invest in mutual funds through SIP or lumpsum investment

There are two investment options for mutual fund investors - you can either make a lumpsum investment or you may invest via SIP. If you have ideal money parked which you feel you may be able to put to better use, you may make a lumpsum investment.

But if you want to give your investments a systematic approach, you may consider investing in mutual funds via SIP. Systematic Investment Plan or SIP is a systematic investment approach where all one needs to do is instruct their bank and every month on a fixed date, a predetermined amount is debited from your savings account and transferred to the fund.

So if you are planning to invest in mutual funds, you may start investing now through a systematic investment plan.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.