How to Start Investing in Mutual Funds in India: A Beginner's Guide to SIPs
Building wealth does not necessarily start with a large amount of money. It starts with a financial goal, a disciplined approach and an understanding of where your money is being invested.
For many investors in India, mutual funds and Systematic Investment Plans (SIPs) provide a convenient way to begin an investment journey. This beginner's guide explains the fundamentals before you start.
What is a Mutual Fund?
A mutual fund pools money from multiple investors and invests the collected money in securities according to the investment objective of the particular mutual fund scheme.
Mutual fund schemes can invest in different asset classes. Equity-oriented schemes primarily invest in shares, debt schemes primarily invest in fixed-income securities, while hybrid schemes invest across multiple asset classes.
What is an SIP?
SIP stands for Systematic Investment Plan. It is a method of investing a fixed amount regularly into a mutual fund scheme instead of investing the entire amount at one time.
For example, an investor may choose to invest ₹2,000, ₹5,000 or another suitable amount every month depending on their financial situation and goals.
An SIP is a method of investing and should not be confused with a separate investment product.
Why Do Investors Use SIPs?
One of the primary benefits of an SIP is investment discipline. Instead of attempting to predict the perfect day to enter the market, investors can invest periodically according to a planned schedule.
Regular investing can also make it possible to begin an investment journey without waiting to accumulate a large lump sum.
However, SIPs do not remove market risk and do not guarantee investment returns.
How to Start a Mutual Fund SIP in India
1. Define Your Financial Goal
Before asking "Which mutual fund should I invest in?", first ask "What am I investing for?"
Your objective might be children's education, buying a home, retirement planning, building long-term wealth or another financial goal.
A useful framework is:
2. Determine Your Investment Horizon
Your investment horizon is the period available before you expect to need the money. A goal two years away can require a very different approach from a goal that is fifteen or twenty years away.
3. Understand Your Risk Profile
Mutual fund schemes have different levels of investment risk. Investors should understand both their ability and willingness to tolerate fluctuations before selecting an investment.
SEBI requires mutual fund schemes to display a Riskometer to help investors understand the risk associated with a scheme.
4. Decide How Much You Can Invest
There is no single SIP amount that is appropriate for every investor.
Consider your income, regular expenses, emergency requirements, existing financial commitments and long-term financial goals when determining an affordable investment amount.
5. Understand the Mutual Fund Category
Mutual funds include categories such as equity, debt and hybrid schemes, among others. Different categories can have different investment objectives and risk characteristics.
Instead of asking only which mutual fund has generated the best return, consider whether the investment category is appropriate for your particular financial goal.
6. Complete the Required KYC Process
Investors must complete the applicable Know Your Customer (KYC) requirements before investing in mutual funds in India.
Before investing, review the scheme's investment objective, Riskometer, applicable costs and scheme-related documents.
7. Review Your Investments Periodically
Starting an SIP is only the beginning. Your investments should be reviewed periodically to determine whether they continue to align with your goals, investment horizon and risk profile.
Periodic review, however, should not be confused with reacting to every short-term movement in the financial markets.
Should You Wait for the Right Time to Start an SIP?
Predicting short-term market movements consistently can be difficult. For a goal-oriented investor, a more useful starting point is determining whether you are financially prepared to invest and whether the selected investment is suitable for the intended financial goal.
Your decision should therefore consider your financial goals, investment horizon, financial circumstances and ability to take investment risk.
Planning to Start Your Mutual Fund Investment Journey?
FundDisha helps investors understand mutual funds and structure their investment approach around financial goals, investment horizons and risk profiles.
Schedule a Consultation Try Our SIP Calculator Connect on WhatsAppFrequently Asked Questions About SIPs and Mutual Funds
What is the full form of SIP?
SIP stands for Systematic Investment Plan. It is a method of investing a fixed amount into a mutual fund scheme at regular intervals.
Is SIP a type of mutual fund?
No. SIP is a method of investing in a mutual fund scheme rather than a separate category of mutual fund.
How much should a beginner invest in an SIP?
There is no universal amount. The appropriate contribution depends on factors including income, expenses, existing commitments, financial goals, time horizon and risk profile.
Are SIP returns guaranteed?
No. Mutual fund investments are market-linked, and an SIP does not guarantee returns or eliminate investment risk.
How do I choose a mutual fund?
Consider your financial objective, investment horizon, risk profile and the investment objective and risk characteristics of the scheme rather than relying only on historical returns.