Smart Mutual Fund Investing With 3 Lakhs

If you're looking to invest 3 lakhs in mutual funds, there are a few things you should keep in mind. Firstly, it's important to be clear about your financial goals and the period for which you want to invest. Different mutual funds cater to different investment horizons, so understanding your goals is key. You can use an online mutual fund calculator to help you assess your expected rate of return. These calculators are simple to use and can help you determine your potential returns. Additionally, understanding the different types of mutual funds is crucial. For example, equity schemes fall under the high-risk-high-return category and typically require a long-term investment horizon of over five years. On the other hand, debt funds are a good option if you're risk-averse or have short-term financial goals, as they offer low to moderate returns with lower risk. Lastly, it's always recommended to consult a financial advisor to get personalized advice based on your specific circumstances.

Lump-sum vs. Systematic Investment Plan (SIP)

Lump-sum and Systematic Investment Plan (SIP) are two primary strategies for investing in mutual funds. They differ in terms of investment frequency and amount. Here is a detailed comparison between the two:

Lump-Sum Investment

Lump-sum investment involves investing a large sum of money in a mutual fund in one go. It is a one-time payment made at the beginning of an investment period, requiring a substantial allocation of funds upfront. Lump-sum investments are suitable for short-term investment goals and investors comfortable with market fluctuations. They offer the potential for higher returns if market timing is favourable, but also carry increased risk due to market volatility. Here are some scenarios where lump-sum investments may be preferable:

• Sudden windfall, such as an inheritance or bonus
• Compelling investment opportunity, especially during market downturns
• Long-term financial goals, like retirement planning or funding education
• High risk tolerance and comfort with market volatility
• Short-term goals, like purchasing a car or going on vacation

Systematic Investment Plan (SIP)

SIP, on the other hand, involves investing smaller amounts of money on a regular basis, such as monthly or quarterly. It is a popular investment plan that allows investors to invest a fixed amount of money in a mutual fund periodically. SIPs are ideal for individuals with consistent income streams and promote investment discipline by gradually accumulating wealth over time. Here are some key advantages of SIPs:

• Regular investing: SIPs enable investors to invest a fixed amount at regular intervals, making it easier to commit to investment goals.
• Flexibility: Investors can start with a small amount and gradually increase their investment over time.
• Dollar-cost averaging: By investing a fixed amount regularly, SIPs average out the purchase price of investments, reducing the impact of short-term market volatility.
• Long-term wealth accumulation: SIPs offer a disciplined and gradual approach to investing, potentially generating long-term wealth.
• Mitigation of market timing risk: SIPs allow investors to invest across different market cycles, removing the need to time the market.

The choice between lump-sum and SIP depends on individual preferences and financial goals. Lump-sum investments are suitable for those with surplus funds or a lump-sum amount, providing the potential for quicker capital appreciation. SIPs, on the other hand, offer the advantage of rupee-cost averaging and disciplined investing, making them ideal for those seeking consistent, periodic investments. Ultimately, investors should carefully assess their financial objectives and consult a financial advisor to determine the most suitable strategy.

Mutual fund calculator

A mutual fund calculator can help you understand how much you need to invest to achieve your desired monthly income. For example, if you want to have a monthly income of ₹3 lakh during your retirement, you can calculate how much you need to invest each month to achieve that goal.

Let's say you plan to retire in 30 years and want to ensure you have enough to last you for 25 years post-retirement. Keeping life expectancy and inflation rates in mind, a mutual fund calculator can determine the corpus you need to save up. For instance, with a life expectancy of 25 years post-retirement and an inflation rate of 6% per annum, an individual would require a corpus of around ₹7.2 crore to receive a monthly income of ₹3 lakh for the next 25 years.

To achieve this investment goal, financial experts suggest starting to invest in a Systematic Investment Plan (SIP) as early as possible. SIPs are a popular choice for mutual fund investments, especially for individuals who are early or mid-career and don't have a large sum to invest. By investing a fixed amount regularly, SIPs help you save consistently and benefit from the power of compounding.

When considering how much to invest in mutual funds, it's recommended to save about 30% of your monthly income. If you're 35 years old, you can invest a percentage equal to 100 minus your age, so 65% of your monthly savings. This would amount to investing ₹39,000 per month.

You can further diversify your investment portfolio by dividing this monthly investment across different types of mutual funds, such as Large Cap Funds, Mid Cap Funds, Flexi Cap Funds, and thematic funds like Small Cap Funds or Value Funds.

It's important to remember that investing in mutual funds comes with varying levels of risk and return. Equity schemes, for instance, typically fall under the high-risk-high-return category and are suitable for long-term investment horizons of over five years. On the other hand, Debt Funds are a good option for risk-averse individuals or those with short-term financial goals, offering low to moderate returns with lower risk.

Before investing, ensure you understand your financial goals, investment horizon, and risk appetite. Consulting a financial advisor can provide personalized advice tailored to your specific circumstances.

Direct plans vs. regular plans

When considering how to invest 3 lakhs in mutual funds, it is important to understand the differences between direct and regular plans. All mutual fund schemes offer these two plans, and investors should assess their goals and expertise before choosing.

Direct plans are bought directly from the Asset Management Company (AMC) without any intermediary such as a distributor, broker, or banker. The investor can go to the AMC website or office to invest in direct plans or use SEBI Registered Investment Advisors (RIAs), who charge a fee for their services. Since there is no intermediary, direct plans have a lower expense ratio and can offer higher returns in the long run. Direct plans are often accessed online, giving investors more independence in managing their investments.

Regular plans, on the other hand, are purchased through intermediaries such as mutual fund distributors, brokers, or bankers. These intermediaries provide services like advising investors, submitting Know Your Client (KYC) documents, and assisting with the investment process. For these services, the intermediaries receive commissions from the AMC, which are added to the total expense ratio (TER) of regular plans. Regular plans are suitable for investors who prefer personalized guidance and assistance in selecting and managing their investments.

The TER covers the recurring operating expenses incurred by the mutual fund company in servicing the investor, including management fees, registrar's fees, trustee fees, marketing costs, and distribution costs. The TER is charged to the investor and adjusted in the price or Net Asset Value (NAV) of the unit. Since the TER of regular plans is higher, the NAV is lower compared to direct plans.

The difference in TER between regular and direct plans can range from 0.5% to 1%, affecting the returns of each plan type. Over a long investment horizon, the difference in returns can be substantial. For example, if the TER of a regular plan is 0.75% more than a direct plan, the direct plan will give a 1% higher CAGR return.

When deciding between direct and regular plans, investors should consider their investment goals, risk appetite, and level of expertise. Direct plans may be more suitable for experienced investors with market knowledge who are willing to monitor their investments independently, while regular plans offer the guidance of financial advisors for those who need it.

Equity mutual funds

Equity funds are managed by professionals who select stocks to deliver maximum returns while controlling risk. Most funds hold 40-50 stocks in their portfolio to reduce risk. These funds can experience short-term volatility, so investors should be prepared to remain invested for at least five years.

When investing in equity mutual funds, it is important to understand your financial goals and the time horizon for your investment. Equity schemes are typically high-risk, high-return investments that require a long-term horizon of over five years.

If you are 35 years old and have a monthly gross income of Rs 2 lakh, you could consider investing 65% of your monthly savings (approximately Rs 39,000) into five Equity Mutual Fund SIPs of Rs 7,800 each. For the first two SIPs, consider Large Cap Funds like SBI Blue Chip Fund and Nippon India Large Cap Fund, which tend to be less risky and provide stable returns. The third SIP could be a Mid Cap Fund like the HDFC Mid Cap Opportunities Fund, offering potential for higher growth. For the fourth SIP, opt for a Flexi Cap Fund like Kotak Flexi Cap Fund, which provides flexibility to invest in different market segments. Finally, your fifth SIP can be tailored to your risk appetite and investment goals; you may consider a Small Cap Fund or a Value Fund.

It is always recommended to read the offer documents carefully and consult a financial advisor before investing in mutual funds.

Debt funds

There are debt funds with negligible or near-zero risk, such as overnight funds and liquid funds. However, other debt fund categories carry risk, so it is important to check before investing. The best debt fund for you will depend on your investment horizon. If you want to invest for up to one month, overnight funds or liquid funds are a good option. For up to six months, consider ultra-short-duration funds, and for six months to one year, money market funds. If your investment horizon is between one and three years, you can opt for corporate bond funds, banking and PSU bond funds, or short-duration bond funds.

When choosing a debt fund, first decide on your investment horizon, then pick a fund that lends to good companies and has a lending duration similar to your investment duration.

Frequently asked questions