Getting started with mutual fund investments can be overwhelming, especially for beginners. There are hundreds of mutual fund schemes, each with different investment strategies and varying risks.
Continue reading to find out how to choose the right mutual fund scheme that best fits your financial portfolio.
Quick overview of mutual funds
Most of us hire a chartered accountant to file our income taxes as they have the expertise and know-how. Similarly, when you invest in a mutual fund scheme, you hire professional fund managers to manage your investments.
They analyze the market, identify the right bonds and equities, and diversify your assets, helping you earn maximum returns. Also, mutual funds inculcate the habit of disciplined investing, helping you build wealth via compounded returns in the long run.
Simply put, mutual fund investments help you enjoy the benefits of stock market investing without spending time and money tracking and monitoring stocks on your own.
Before you invest in a mutual fund, having a clear picture of the expected returns helps you decide if the fund is worth investing in it or not. This is where a mutual fund calculator comes into the picture.
What is a mutual fund calculator?
It is a free online tool that helps you estimate the returns from a mutual fund investment. Just like a loan EMI calculator, you have to provide a few simple inputs like:
Nature of investment – monthly SIP or one-time lump sum
Investment amount
Frequency of SIP
Investment period
Expected return rates
Once you enter these details, the calculator computes the total investment amount, expected maturity amount, and wealth gained, giving you a clear picture of the expected returns at the end of the investment period.
It is crucial to understand that a mutual fund calculator only provides you with estimates based on your inputs, and it doesn’t guarantee returns. The returns you gain depend on the fund's performance and can either be higher or lower than the estimates offered by the calculator.
How does a mutual fund calculator help you?
A mutual fund calculator is a handy tool that helps you plan your financial future. Here are the top benefits of using a mutual fund calculator before investing in mutual funds:
It gives you an idea of how much to invest in monthly SIPs to reach your financial goals.
You can use the online mutual fund calculator any number of times and from anywhere. It’s free, and you can use it repeatedly for different inputs.
You can reset the values and figure out the right investment amount and tenure to meet your financial goals.
It gives a reasonably accurate estimate of the expected returns from your mutual fund investments.
They are quick and easy to use, saving you valuable time by eliminating the need for manual calculations.
Most online mutual fund calculators use advanced algorithms to factor in market volatility and other factors while calculating the estimated returns.
How does a mutual fund calculator work?
A mutual fund calculator estimates the returns from your investment using the compound interest formula and the concept of future value. Let’s explain this with examples.
One-Time Investment
Let’s say you invest Rs. 1 lakh as a lump sum in a mutual fund for 10 years. You expect the rate of return to be 10% per annum. The calculator estimates the maturity amount using this formula:
Maturity Value = Present Value (1 + r/100)^n
In this example, the present value is Rs. 1,00,000; r refers to the rate of return, which is estimated at 10%; n represents the duration of investment, which is 10 years.
The calculator calculates the maturity value as:
Maturity value = 100000 (1 + 10/100)^10
Maturity value = Rs. 2,59,374
Based on this calculation, the total gains from your Rs. 1 lakh investment are estimated to be Rs. 1,59,374.
SIP Investment
For SIP investments, the calculator uses the formula:
Maturity Value = Present Value [(1+i)^n-1]*(1+i)/i
Here, I refer to the compounded rate of return, n is the investment duration in months.
Let’s say you invest Rs. 500 per month in a mutual fund scheme via SIP for an investment tenure of 10 years with an estimated return of 7% per year.
Here i is calculated as i=r/100/12; In this case, r is 7%, which makes i = 7/100/12. The maturity value is calculated using the formula:
Maturity Value = 500 [(1+0.005833)^120 -1] * (1+0.005833)/0.005833
Maturity Value = Rs. 86,542
How should you invest in mutual funds?
Investing in mutual funds is easier than ever before, thanks to digital banking and eKYC. You have three different options to begin your mutual fund investments. They are:
Direct Plans through AMCs
You can approach any asset management company of your choice and invest directly in the plans they offer. The benefit of this option is that you’re charged a low expense ratio, as AMCs do not charge distributor commissions.
Most AMCs offer you the option to commence mutual funds investments online, either through their website or mobile app. Alternatively, you can also visit the nearest branch of an AMC to begin your investments.
Mutual Fund Distributors
You can contact an authorized mutual fund distributor to help you with the documentation and begin your investment. Note that in this option, you’ll have to pay the distributor’s commission that is added as a fee to your investment.
Third-Party Portals
Third-party portals like Black from ClearTax make it easy to invest in mutual funds. You can choose mutual funds from any number of AMCs and manage all your investments from a single app or interface.
How to use a mutual fund calculator?
Using an online mutual fund calculator is a breeze. All you have to do is key in the required inputs, and the tool calculates the expected returns immediately. Follow these steps while using an online mutual fund calculator:
Step 1: Nature of investment
Here, you have two choices: SIP (Systematic Investment Plan) or One-time Lump Sum. In a SIP, you invest a fixed sum every month (fortnightly or quarterly).
In a one-time lump sum, the investment is made only once during the investment tenure. You can pick either of these options depending on your financial situation.
Step 2: Investment amount
Enter the amount you wish to invest. Most mutual funds allow investors to invest SIPs starting from as low as Rs. 500 per month.
Step 3: Frequency of SIP
If you have selected SIP in the first step, you’ll have to mention the frequency of investments. You decide on either monthly, fortnightly, or quarterly.
Step 4: Expected Rate of Return
While it’s not possible to predict the expected rate of return, you can make a close guess based on the historical performance of your chosen mutual fund investment plan. Enter the rate of returns as a percentage.
Step 5: Duration of SIP
This is the investment tenure and can range anywhere from to any number of years.
Once you enter these details, you can see the expected returns at the bottom of the calculator. Some calculators also give you an overview of the total investment made and the total gains as a graphical representation for easy understanding.
As you play around with the input values, the returns chart and the overview change automatically, giving you a clear picture of the investments you need to make to achieve your financial goals.
Frequently Asked Question
Q1. How can I invest in mutual funds in India?
You can invest in mutual funds in India in three ways: through the direct plan offered by AMCs, via an authorized mutual funds distributor, or via third-party mutual fund portals. All these methods require you to submit an application form along with KYC documentation.
Once your documentation is verified, and the application is processed, you can begin investing in your preferred mutual funds either as SIPs or lump-sum investments.
Q2. How can I invest in mutual funds online in India?
Follow these steps to invest in mutual funds online:
- Choose your preferred AMC or mutual fund distributor.
- Submit the application form and upload the required KYC documents.
- Once your application is verified, log into the portal and select your preferred mutual fund scheme.
- Select the amount and nature of investment (SIP or one-time lump sum).
- Complete the transaction to begin your mutual fund investments.
Q3. How can a beginner invest in mutual funds in India?
As a beginner, the first step is to decide the right mutual fund schemes based on your financial objectives and risk appetite. Once you have selected the plan, follow the steps given in the previous answer to begin your investment.
Q4. Can I invest in mutual funds without a Demat account?
It is not mandatory to have a Demat account to invest in mutual funds. The only requirement is to submit your PAN and other KYC details to the mutual fund house.
Q5. How much should I invest in mutual funds every month?
The right amount to invest in mutual funds depends on your salary, ongoing loans, and financial situation. You can follow the 50:30:20 rule to decide the amount to invest every month.
As per this rule, 50% of your salary goes to basic expenses, 30% on needs, and the remaining 20% on investments and savings.