Are mutual funds risky for a novice?

This is a question we come across quite often. They regularly crop up in people’s mind and at times in internet forums and discussions. Let’s look at the issue a little elaborately.

Fact is there will always be the fear of the unknown for anything. If you familiarise yourself with the basics, then your fear will certainly be replaced by reason. We can control the outcome of an event when we understand how it works and the causes and effects. On the other hand, if we have no idea about something, then we are all at sea in that aspect. We would fear to handle that task or subject.

Equity Mutual funds invest their money in stock market where they act to own chosen parts of ownership of a selection of companies. The idea is to gain from the progress of these companies that will get reflected in the higher prices for those part ownerships.

Mutual funds are in India from 1964 in the form of Unit Trust of India and in the current regulated and professional form from about 1993. As population and prosperity has grown mutual funds have made tremendous progress. Being a developing economy, the scope of economic progress is outstanding in India. So mutual funds attempt to seek a pie of out of that ever-growing cake.

Because mutual funds invest in equity shares of companies (ownerships), their values fluctuate due to their prices being the result of buying and selling actions in the market. Throughout the trading hours prices go up and down till we get the closing values at end of day.

If you choose open ended funds, your money is liquid in the sense that you can withdraw at any time and get your money back in 3 working days through electronic transfer in your bank account. However, a shorter period of holding will entail about 1% exit load.

There is a 15% flat income tax on your gains if your holding period is less than a year. If your holding period is more than a year, then your gains up to Rs 1 lakh every year is exempt from tax even under the new and proposed changes. If your profits exceed Rs 1 lakh, 10% income tax will apply.

There is risk of losing money if you are dependent on the money invested in the short term. But as the period of investment increases your chance or risk of losing money will gradually come down.

Another factor is choosing the category of funds you are investing in and the scheme you have chosen. You must invest in only highly rated low risk options when you start.

Equity mutual funds can be a great option with returns beyond your expectations, if you can segregate some money for the long term that you will not withdraw in a hurry, barring of course, any unforeseen circumstances.

Do you know someone who has invested in Systematic Investment Plan (SIP) for the last 15-20 years?

Here is the answer I posted a little while back at Quora:

Yes, of course. SIPs over long years help you get investing results over a complete investment cycle. That's why you are advised to stay invested for 5-7 years.

With an investing experience of many years and a relevant consulting experience of two decades, I feel I am qualified to add a few practical aspects so that the risks involved are clearly laid out.

First, there is no escape from the fact that if we incur higher costs of acquisition...Click here to read the entire answer.

The Search for The First Scheme to Invest

If you are like most people who start out saving and investment from their salaries, you must be familiar with an option called SIP or Systematic Investment Plan that simply means investing a preset amount every month on a preset date in a mutual fund scheme that invests in equity or stock market.

Essentially, the idea is that while promoting a regular saving habit this method of investing uses various entry dates and therefore various purchase prices to maximise the gains from one's investments.

Equity investing being investing in fluctuating market that has varying ruling prices even within a single day is ideally suited for SIP because when prices fall you buy more quantity with the same money whereas when prices are higher you acquire less quantity. This helps in controlling the average acquisition price.

However, to get started you also need to know where to start and it'd be useful to know what key things to keep in mind for a simple solution to find the best sip plans.