For a beginner, the world of investing is vast and intricate, and often overwhelming. Stocks, bonds, mutual funds, fixed deposits, real estate, commodities, and lately, cryptocurrencies, are just some of the options you have. So, where do you start and how do you go about it?
Arguably, the simplest way of investing your money is in mutual funds because here, much of the thinking is done by professional fund managers. All you have to do is figure out which mutual fund suits your investment objective, and how much you’re willing to invest.
Here’s a simple guide to help you out. But before thinking of investment options, the first thing you need is a dematerialised account, or a Demat account.
Step 1: Create Demat Account
A Demat account is a digital account in which all your share investments, mutual fund investments, and bonds will be recorded. Opening a Demat account is very easy and quick, especially with a modern platform like Kotak Neo, where the account opening takes just a few minutes.
Step 2: Choose The Investment Method
Once the demat account is active, there are two ways you can invest in a mutual fund:
- Lumpsum: This is a one-time investment. If you happen to have some cash, say a bonus, a tax refund, or just extra savings, you put it into the fund all in one go and let it get to work.
- SIPs: These are Systematic Investment Plans, which means you’re committing a fixed amount (usually lower than a lumpsum) at a fixed time interval (monthly, most commonly).
While lumpsum investments work well for those with irregular income, or when you get a bonus, SIPs help in building a savings habit with repeated, disciplined investing.
SIPs also fit neatly into monthly salary cycles and budgeting. But perhaps the main reason why they’re so popular is because the minimum amount required is just ₹100. With ₹100 every month, you can build a savings habit, and a corpus. This is especially useful if income is on the lower side or if savings are hard to maintain.
You can also calculate your estimated returns using an SIP calculator. You just have to enter the amount you would want to invest, and years of investing, and this calculator will give you an estimate of returns over the years.
Step 3: Choosing The Right Funds
Mutual funds vary from low risk to very high risk. Low risk funds or debt funds usually invest in government bonds and Treasury bills, with the objective being stable, and providing relatively assured positive returns.
High risk funds invest in equity markets, or company stocks, therefore carrying higher risk, with the potential for higher gains. There are sub-categories with varying risk. Large-cap funds are generally viewed as safe bets, while thematic and small cap funds are considered riskier.
There are hybrid funds that invest in both, equities, and debt instruments to balance risk and reward. Within that there are sub-categories largely driven by the ratio of equity and debt investments.
Someone who’s in their mid or late 20s and has started earning may prefer investing aggressively in equity mutual funds, as young professionals may have higher risk-taking ability given that they have a longer period to take advantage of rupee cost averaging.
As you go through the stages of life, risk-taking ability reduces, so for a person nearing retirement, more allocation to debt instruments is preferred in order to preserve capital and earn regular income.
Step 4: Setting Up The SIP
Your investment platform allows you to explore different categories of mutual funds. You can browse schemes based on category, risk level, historical performance, investment objective and even rating.
You can select a fund and initiate the SIP. For example, an SIP amount of ₹500, invested monthly, on the 7th of every month, or as close to your salary day.
Submit the order, and your SIP is set up. Now on the 7th of every month, you will be investing ₹500 in your selected fund.
Step 5: Auto-debit SIP Amount
Open the linked bank account and allow your investment platform to automatically debit the SIP amount from your account on the fixed date each month. The investment platform prompts for the permission which you must allow, and confirm from your bank account as well, under Autopay options. Autopay simplifies SIP investing as it takes the decision away from you every month.
Step 6: View And Review
Once the first SIP payment goes through, pay attention to the dashboard on your investment platform. Observe the invested value, current value, gain or loss, units purchased, and the next SIP date.
Now the idea is to continue investing every month, for a long period, for compounding to show its effects. Use the SIP calculator to understand how your investment can grow over different time periods. Staying invested for longer is key to wealth growth.
Can I Edit SIPs In Emergencies?
Yes, you can change the amount and the auto-debit date. While there is no “pause” option, you can typically stop the SIP up to 7 days before the next instalment, and resume investing whenever you can. However, introducing a break to your SIP investment is not recommended as you lessen the impact of compounding.
Conclusion
Starting an SIP after opening a Demat account is mostly a step-by-step digital and simple process now. Complete the verification, choose the mutual fund, enter the SIP details, approve the mandate, and the investment begins automatically from the selected date.
For most first-time investors, the bigger challenge is rarely the setup itself. It is staying invested long enough for compounding to become visible.
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