Queries
Prarambh Kasturi, email
What is the meaning of direct investing in mutual funds?
Investors, typically, have two options—regular and direct—to invest in mutual funds schemes. Direct plans of a mutual fund scheme allow investors to directly invest in the scheme without taking any help of the intermediaries like advisors or distributors, whereas in the case of the regular option, an intermediary is involved. The advantage with direct mutual fund schemes is that its has lower expense ratio, compared to regular schemes. Expense ratio is higher in case of a regular scheme because distributors are paid commission out of it.
Investment in direct mutual fund options can be considered by seasoned investors, as they can analyse, compare and decide on their own which scheme to invest in. However, if you need advice, take the help of an advisor or financial planner. Many financial advisors work on fee-based modules and charge you for advice and recommendation; you may also take advice by paying the fee and invest in direct schemes.
Jyotsnika, Delhi
I have heard in many YouTube videos about the power of compounding. How does it work?
Compounding works in a very simple manner. Suppose, you have Rs 100 and your money is growing at 10 per cent, then in year one it becomes Rs 110, but in the second year it becomes Rs 121 rather than `120. This is because 10 per cent of 110 is 11, which is higher than the interest of Rs 10 in the first year. Yes, Rs 1 does not sound like a lot, but with each passing year that extra interest starts to compound on itself, and that is what helps you grow your money exponentially.
Promit Basu, email
I have got some money for Diwali from my relatives, and I have some money left over from my birthday in August. I want to invest this in mutual funds. I have seen many ads in newspapers and TV on Systematic Investment Plan (SIP). Should I invest through an SIP?
It is great that you want to start investing, that too after saving money from your pocket money and gifts. Mutual funds can be a good investment avenue and it is even better if you start investing at an early stage of life. The minimum investment in mutual fund schemes is very low, and it is not mandatory to make regular contributions either monthly or early. You can also exit or redeem your investment entirely or partially as per your requirement.
When it comes to investment in mutual funds, you have the option to either invest in a lump sum or in installments in the form of SIP. However, in your case it appears that you want to invest one big chunk of money rather than investing from regular income and, therefore, committing a certain amount to an SIP could be difficult. So, you may consider investing in lump sum. However, to mitigate the market risk, you may choose to invest the lump sum amount in a liquid fund and opt for a systematic transfer plan (STP) to a few different schemes based on a defined asset allocation. Again, selection of the right funds depends on your risk appetite, investment horizon and return expectations. You can take help of an advisor in deciding the right approach.
Rishad Manekia, Sebi-Registered Investment Advisor, and Founder and MD, Kairos Capital