Micro-Investing in Mutual Funds: Is ₹500 Enough to Get Started?
7 August, 20224
Synopsis
Starting with just ₹500 per month in mutual funds can lead to significant wealth creation over time through the power of compounding and rupee cost averaging.
Define your investment objectives, assess your risk tolerance, and prefer equity mutual funds for long-term growth. Gradually increase your SIP amount as your income rises.
Regularly monitor and rebalance your portfolio, avoiding premature withdrawals to maintain the compounding effect and minimise tax implications.
Stay disciplined by investing through market ups and downs, and consider churning your portfolio if a fund consistently underperforms its benchmark.
Just ₹500 can help you buy a car or house! Believe it or not, mutual funds can make it happen. And yes, you can start investing in mutual funds with just small amount of ₹500! Investing smaller sums regularly in mutual funds is a smart strategy with the power of compounding and rupee cost averaging to create wealth over time to realise your dreams.
There are a few important things that you need to keep in mind:
Define Your Investment Objective
Before starting to invest, define your specific financial plan. Are you investing for retirement 20 or 30 years away? Or for your child's education 5 years away? Or just general wealth creation over the next 10 years? Your investment horizon influences how much risk you should take. Longer periods allow you to invest in riskier assets like equities to earn higher inflation-beating returns.
Assess Your Investment Appetite
Are you a conservative investor who cannot stomach much volatility, or are you willing to take higher risk for higher rewards? Your risk tolerance should guide how much you allocate to equity funds versus debt funds. Low-risk tolerance means sticking largely to debt funds. If you can handle some ups and downs, you can include equity exposure.
Start SIP in Index Funds
Begin your mutual fund journey by starting a monthly systematic investment plan (SIP) in one or two index funds like Nifty 50 or Sensex index funds. Index funds simply mimic the underlying index and provide ready diversification across the top blue-chip stocks.
Prefer Equity over Debt
When starting small with only ₹500 per month, you can prefer equity mutual funds over debt funds for long-term wealth creation. Equity has outperformed debt by large margins over 10-20-year periods.
Increase the SIP Amount Gradually
Begin with an SIP of just ₹500 per month. As your income grows yearly, increase the SIP amount by 10-20% annually. For an investor starting with an SIP of ₹500 growing at 15% yearly will amount to a corpus of nearly ₹2 lakh in 10 years at an expected 10% rate of return! A combination of regular investment and periodic increases helps your money grow exponentially, thanks to the power of compounding.
Monitor and Rebalance Your Portfolio
Review your mutual fund portfolio at least every 6 months. See if fund performances and your asset allocation align with your objectives. Rebalance your portfolio to return the asset mix to the original decided levels. For instance, if equities now account for a larger portion due to outperformance, sell some equity units and route the money into debt funds to restore the desired allocation.
Avoid Redeeming Prematurely
Do not withdraw or redeem your mutual fund investments before the target period, as it disrupts the compounding effect. Withdraw only if you have an emergency need for cash. Premature exits also have tax implications. If you redeem equity funds within a year, short-term capital gains tax applies to the gains.
Do Not Time the Market
When investing small sums regularly, there is no need to try to time the market by investing at the right time. Stay invested through ups and downs instead of making emotional decisions like stopping SIPs during market falls. Rupee cost averaging ensures you get more units when prices are lower.
Consider Portfolio Churning
If a fund has consistently underperformed its benchmark by a large margin over a few years, exit it and reinvest the money into a better-performing fund in the same category. But don't churn your portfolio too frequently.
Even with ₹500 per month, you can start your mutual fund investment journey by opting for simple index funds via SIPs, increasing your SIP amount gradually as income grows and staying disciplined. This helps you benefit from the power of compounding and potentially build a sizeable corpus.
You can start investing in mutual funds with a minimum amount of ₹100 and ₹500 with HDFC Bank SmartWealth App. Download the app from Playstore/Appstore to start your investment journey.
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