Ways to invest in Mutual Funds

In the first series of articles that we will publish on PaiseVaise we will try to clear the basic doubts of our readers when it comes to investing in various financial products.

The first product that we cover is "Mutual Funds".

Mutual Funds are nothing but investment vehicles where a group of investors come together, pool in their money and give the same to a mutual fund company (called an Asset Management Company or AMC) whose fund managers manage the money on the behalf of the group of investors for a nominal fee. The aim of the AMC is to generate the best possible return that is in line with investors' risk-return profile which in turn (ideally) should match with the specific fund's investment style.

While the types of mutual funds and the expected returns portion will be covered in a separate thread, here, today we will be touching on the ways to put your money in mutual funds.

Systematic Investment Plan (SIP)

Often you would come across friends, colleagues or relatives advising you to start an SIP (it may be the case that you are recommending SIP to your friends, colleagues or relatives). SIP is the most popular form of putting your money in mutual funds with a monthly inflow of over 1.2 billion dollars (over Rs, 8,500 crores) through this route. An SIP is an investment tool by which you put a specified amount of money in the mutual funds of your choice on a monthly basis (can put daily also, although monthly SIP remains the most popular style). E.g. A Rs. 5,000 SIP in ICICI Bluechip Fund would mean that on a specific date every month (say 15th), Rs. 5,000 gets debited from your bank account and gets invested in ICICI Prudential Bluechip Fund.

The advantage of SIP is that, firstly, it brings a sense of financial discipline in you and, secondly, you are investing in markets during upswings as well as downswings thus averaging your investment cost every month. SIPs start from as low as Rs. 500 per month and can be stopped, increased or decreased in value at any time.

Lumpsum Investment

Suppose you have an amount of Rs. 1,00,000 that you would want to invest but can't invest Rs. 1,00,000 every month. You would want to invest money once and then sit and wait for the money to grow without committing a regular installment. In this case, you do a lumpsum investment. Lumpsum investment can be done on any transaction day (weekdays minus holidays).

The advantage of lumpsum investment is that you are saved from a monthly duty to put in money. Also, when the investors get money in bulk (bonuses, windfall gains in business, etc.), they may want to put it in one go as they may already have existing SIPs.

Difference between SIP and Lumpsum

Often investors approach their advisors and from the knowledge that they have earned from their circle, tell their advisors that they want to start an SIP and not want to put money in mutual funds (meaning lumpsum) as SIP is beneficial. To clarify this, both SIP and lumpsum invest in the same funds and the only difference is the style of investment. In SIP you put an amount every month and in lumpsum, there is no such obligation. You can invest daily, weekly, monthly, yearly or just once in your lifetime in case of lumpsum.

Systematic Transfer Plan (STP)

STP is an investment style which is getting popular day by day and is a good way to park your money in case of volatility when you do have money to put in as lumpsum but the market conditions/valuations are high because of which the investor doesn't want to put in his entire stake in risky funds. STP is a combination of lumpsum and SIP.

In STP, the investor invests lumpsum money in a fund with low risk (one which gives you a Fixed Deposit kind of return with minimum risk). From this fund, a periodic transfer facility is opened wherein at a specific period a set amount will be transferred from this fund to a more risky fund. This method will automatically average out the money being invested in risky fund thus doing the work of an SIP. The transfer can be done daily, weekly, fortnightly, monthly & even quarterly.

For example, an investor wanting to invest Rs. 1,00,000 in ABSL Equity Fund (a market-linked fund) instead puts the money in ABSL Liquid Fund (which has low risk) and starts a monthly STP of Rs. 10,000 in ABSL Equity Fund thus getting exposure of the markets stepwise over a period of 11 months (How 11? 10x10,000 = 1,00,000 and the 11th installment will contain the additional amount that the investor has earned by investing in the liquid fund over the previous 10 months). STP also means minimum entries from your bank account as the money is transferred from the bank just once and after that from one fund to another of the same AMC.


The three ways to invest in mutual funds are the most popular ones. In case you like the article, please share it in your circle. Also please feel free to contact us for feedback as well as to invest in financial products. Happy Reading!

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