Different modes to Invest in Mutual Funds

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There are 3 ways to invest in Mutual Funds (MF)

Lump-sum

It is a one-time investment. Many prefer to do lump sum investing because there is no recurring liability. Lump-sum investments are good if you can time your investment well. Otherwise, it should be avoided. Due to lack of planning, many investors are forced to invest in this way to meet a deadline. Go for this route only if you have higher risk tolerance.

Systematic Investment Plan (SIP)

This is a better option for retail investors since it averages the cost of investment. Do note that SIP allows you to break one big amount into smaller pieces. This takes away the focus on timing the market. This is because you are buying at different points in time. Any restrictions on investment, however, apply to each SIP instalment. If you want to be automated and worry-free investing, continue SIP-ing.

Systematic Transfer Plan (STP)

Generally, one starts with an STP when there is a lump sum to invest. Like a SIP, an STP helps spread investments over a period of time to average the purchase cost. This method rules out the risk of getting into the market at its peak. With an STP, an investor can invest a lump sum in one scheme and transfer a fixed amount regularly to another scheme. An STP can be done from an equity fund to a debt fund or from a debt fund to an equity fund. This approach reduces the risk of investments being hit near the target date i.e. maturity. Move your money well before the time when you need the money.

Irrespective of the mode of investment mentioned above, investment in MF can be done in two ways. One is to route your investment through an AMFI registered MF broker called a ‘regular plan’ and second is to invest directly in the mutual fund company called the ‘direct plan’.

The regular plan involves payment of commission to the distributor and hence has a slightly lower NAV as compared to the same scheme in a direct plan. One may opt for a direct plan if he/she has the ability to study and chose the right scheme. For most, taking help from the registered distributor is a better option.

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