The Investment landscape has undergone several changes and introduced some quick investment options. Some of them are mutual funds, SIPs, Bonds, Recurring deposits, Fixed Deposits, National Saving certificates, Corporate Deposits etc. In mutual funds, there is a feature called mutual fund STP, which lets you transfer a pre-determined amount from one scheme of a mutual fund to another scheme at a predefined interval. With the advancement in technology, everything is available online, which has been much improved by the introduction of mobile applications. These apps make everything easily accessible with just a few taps on your mobile phone. Mobile phones are something which is carried anywhere and everywhere, which is why people expect everything to be available to them as quickly as possible. This article talks about key concepts of mutual funds.
How to Invest in a Systematic Investment Plan
SIPs are a disciplined way of investing, in which funds are deducted at a specific interval. This disciplined approach helps to build wealth for the future. The best part about these investments is that one can start with a small amount. In addition to making a systematic investment, these investments help to manage risks better.
How do SIPs work?
To understand SIPs properly a person must know how these SIPs work. This helps to have a smooth investment experience. One of the most preferred ways to invest in these SIPs is through a mutual fund investment app, as people consider it to be quick and easy. There are key features of SIP such as rupee cost averaging and compounding.
Rupee Cost Averaging
Rupee cost averaging means investing a fixed amount of money at regular intervals, regardless of whether the market is up or down. This strategy helps to smooth out the impact of market volatility over time.
For example, let’s say you invest ₹5,000 every month in an SIP (Systematic Investment Plan) of a mutual fund. In one month, the fund’s NAV (Net Asset Value) might be ₹20 per unit, so your ₹5,000 buys you 250 units (₹5,000 / ₹20). In another month, if the NAV drops to ₹16 per unit, your ₹5,000 would buy you 312.5 units (₹5,000 / ₹16). Over time, this averaging helps you buy more units when prices are low and fewer when prices are high, potentially reducing the average cost per unit of your investment.
Compounding
Compounding refers to the process where your investments generate earnings, which are reinvested to generate their earnings. In simpler terms, it’s like earning interest on interest.
For example, if you invest ₹10,000 in a mutual fund that gives an average annual return of 10%, at the end of the first year you’d have ₹11,000 (₹10,000 + 10% of ₹10,000). In the second year, you’d earn 10% on ₹11,000, not just on your original ₹10,000. Over time, this compounding effect can significantly increase the value of your investment.
How to Invest in ELSS?
ELSS funds, which fall under Section 80C of the Income Tax Act, of 1961, serve as a tax-efficient investment option for individuals. These schemes predominantly invest in equity-linked securities, comprising at least 65% of their portfolio allocation. The remainder of their investments are diversified into debt and money market instruments. This strategic asset allocation aims to provide investors with a dual benefit: potential capital growth from equity markets and tax savings under the prevailing tax laws. ELSS funds are designed to appeal to investors looking to optimize their tax liabilities while participating in the potential returns of the stock market.
How do ELSS Funds Work?
ELSS funds are equity mutual funds investing in diversified portfolios of stocks across large, mid, and small-cap companies and various sectors. They aim for long-term wealth growth through active management based on extensive market research and stock selection.
Investments in ELSS qualify for tax deductions under Section 80C, with an annual limit of ₹1.5 lakh, potentially saving up to ₹46,800 in taxes at the highest bracket.
These funds have a mandatory 3-year lock-in period, the shortest among Section 80C tax-saving options. Upon redemption after the lock-in period, long-term capital gains above ₹1 lakh are taxed at 10%. Investors can opt for lump sum or SIP investments for flexibility and cost averaging.
How to Invest in Mutual Fund STP?
Systematic Transfer Plans (STPs) are a lesser-known but useful investment strategy in mutual funds. While many investors are familiar with Systematic Investment Plans (SIPs), STPs offer a different approach to managing your investments.
How does it work?
You invest a lump sum in one fund (called the source or transferor scheme) and then set up regular transfers to another fund (known as the target or destination scheme). The asset management company (AMC) handles these transfers automatically based on your instructions.
This approach can be helpful for investors who want to shift their investments gradually, perhaps from a lower-risk fund to a higher-risk one, or vice versa. It’s a tool that can add flexibility and strategic planning to your mutual fund investments.
Conclusion
With the increasing inflation, the need to be aware of different investment options is necessary. Most investments involve risks, some involve high risk some involve low. This makes it necessary to study investment options before making an investment decision. The above article includes two modes of the famous investment options, that involve moderate risks. These funds are managed by financial experts, but still, it’s important to do your research before investing. ELSS Funds are preferred because they offer tax deductions, however, they have a lock-in period of 3 years. One of the most famous players that offers these investment options is Tata Capital MoneyFy App. The app offers an easy user interface that can help even beginners easily start their investment journey.
