Begin your mutual fund investment journey with just Rs. 500

Many people shy away from mutual funds believing that they are expensive and require a large investment. This is a myth. You can begin your mutual fund investment journey with as little as Rs 500.

This article tells you more about how small but consistent investments have the potential to build wealth over time.

• Table of contents

1. Can you invest in mutual funds with just Rs. 500
2. Is Rs. 500 enough?
3. Benefits of starting small in mutual funds
4. Types of mutual funds suitable for Rs. 500 investment
5. Tips for beginners starting with Rs. 500
6. Things to consider before investing Rs. 500 in mutual funds

Can you invest in mutual funds with just Rs. 500?

A mutual fund is a type of investment vehicle that pools money from various investors and puts it into stocks, bonds, or other securities. This makes it possible for you to begin your investment journey with only Rs. 500.

A popular route for mutual fund investments is a Systematic Investment Plan or SIP. When you invest through SIP, you put in a fixed amount into the mutual fund at regular intervals. These intervals could be daily, weekly, monthly, quarterly etc.

Is Rs. 500 enough?

Small but consistent investments, especially in equity mutual funds, have the potential to build wealth over time. This is because of the effect of compounding on your investments. When the returns on an investment are reinvested, they go on to earn further returns. This has the potential to result in accelerated growth.

Moreover, if you’re young and your goals are several years away, Rs. 500 can be a good starting point. It can potentially help you create a modest corpus that you can then build on when your income increases. Additionally, it can help create a disciplined investment habit.

An SIP calculator can help you see the potential return on a Rs. 500 SIP. All you need to do is enter the SIP amount, tenure and expected rate of return to see the result. Let’s assume that you plan to do a monthly SIP of Rs. 500 in an equity mutual fund for 10 years. Your expected rate of return, based on the fund’s historical performance, is 12%* per annum.

Your total invested amount at the end of 10 years will be Rs. 60,000 and the potential corpus may amount to Rs. 1,15 lakh. Over 30 years, you would have invested Rs 1,80,000 and your corpus may potentially grow to more than Rs. 17 lakh. This example also shows the power of compounding in action – over 10 years, your investment grows by over 90% approximately, whereas in 30 years, it grows by over 800%.

*Do note that this example assumes a fixed and consistent rate of return. In reality, returns are not guaranteed and may fluctuate based on market trends and other factors. Moreover, past performance may or may not sustain in the future.

A small SIP amount may also suit those who save money in traditional avenues and want to try out mutual funds, but with a small investment.

Benefits of starting small in mutual funds

Starting with small SIPs can be a suitable strategy, especially for beginners. Here’s why:

Lower entry barrier: By starting with small investments, you can enter the market without putting substantial capital at risk. This can help you get acquainted with investing before you commit to a large amount.

Gradual exposure: With small investments, you gain exposure to the market incrementally, allowing you to learn how it behaves over time and understand the risks involved.

Habit formation: Committing to small, regular investments through Systematic Investment Plans (SIPs) helps establish disciplined investing habits. It encourages consistency, helping you stay on track with working towards long-term financial goals.

Rupee cost averaging: Regularly investing the same helps reduces the impact of volatility on your investments, as you automatically purchase more units when markets are down and fewer when they are up. As a result, you can capitalise on market dips and avoid buying too many units during market peaks. Over time, this also typically reduces your per-unit investment cost.

Easy adjustments: Small investments provide flexibility. As your financial situation improves, you can increase your investment amounts without a significant strain on your budget.

Power of compounding: Small, consistent investments can grow substantially over time, thanks to the power of compounding. Even modest contributions can potentially lead to significant growth over the long term.

Types of mutual funds suitable for Rs. 500 investment

Generally, a Rs. 500 SIP investment is more suitable over the long-term than the short term, because a longer investment horizon can enhance the potential of compounded growth. Here are some schemes that long-term investors can consider:

Large-cap funds: These funds invest in large, well-established companies. They are typically considered less risky compared to mid-cap or small-cap funds, offering relatively steady return potential with lesser fluctuation than smaller stocks.

Mid-cap funds: Focused on medium-sized companies, mid-cap funds present the potential for higher growth, though they come with a higher level of risk compared to large-cap funds.

Small-cap funds: These funds invest in smaller companies, which carry significant growth potential but also come with higher risk due to their volatility.

Index funds: These funds track a specific market index, offering a low-cost, passive investment option for those seeking returns in line with the broader market.

ELSS (Equity Linked Savings Schemes): These funds offer tax-saving benefits under Section 80C of the old regime of the Income Tax Act, 1961, making them a dual-purpose investment for tax planning and potential long-term wealth creation.

Aggressive Hybrid Funds: With a greater emphasis on equities, these funds provide higher growth potential but also come with increased risk, making them ideal for more risk-tolerant investors.

Tips for beginners starting with Rs. 500

Starting with Rs. 500 can help beginners embark upon their investment journey. Here are some tips:

1. Understand your risk tolerance: Determine how much risk you're willing to take. Are you okay with market fluctuations, or do you prefer a relatively stable approach? Select funds that match your comfort level and risk tolerance.
2. Adopt a long-term perspective: SIPs in equity-oriented mutual funds usually work better in the long term. Avoid seeking short-term returns and making rash decisions based on brief volatility.
3. Stay invested: Resist the urge to withdraw your investments during market downturns. Stick to your long-term goals.
4. Learn about mutual funds: Familiarise yourself with important investment concepts such as risk, return, diversification, and compounding.
5. Read and research: Stay updated on financial news and market trends.
6. Seek professional advice: If you're uncertain about your investment choices, consider seeking guidance from a certified financial advisor who can tailor advice to your specific situation.
7. Gradually increase: As your investing capacity increases (with salary increments etc.), consider increasing your SIP amount. This can allows your investments to grow without overwhelming your budget.

Things to consider before investing Rs. 500 in mutual funds

Here are some factors investors should keep in mind when contemplating a Rs. 500 SIP.

• Start early: The earlier you start investing, the more time your money has to benefit from compounding. So, if you are considering a low initial investment, it would be advisable to start early.
• Choose the right scheme: If long-term capital appreciation or wealth-building is your goal, an equity scheme may be suitable. On the other hand, if you’re looking at building an emergency corpus or a liquid cash reserve, you may consider a short-term debt fund.
• Be consistent: Choose the investment frequency that works best for you, and then diligently stick to it. It is advisable not to stop or pause your SIPs, even if your expenses increase. It is also important to be patient and not expect remarkable growth in the short term.
• Increase your SIP amount or opt for a step-up SIP: If your income increases or your expenses decrease, you can increase your SIP amount. You can also opt for a step-up or top-up SIP that enables you to increase your investments by a fixed percentage at regular intervals. For example, if you choose an annual 10% top-up, your SIP amount will increase from Rs 500 to Rs 550 in the second year, then Rs 605, and so on. Using a Step Up SIP Calculator can help you see how these gradual increases can potentially impact your overall returns. Based on your initial SIP amount, tenure, expected rate of return and step-up percentage, the calculator estimates the potential size of your final corpus. However, actual returns depend on market conditions and may be higher or lower than your expected rate.
• Supplement it with lumpsum investments: When you have surplus funds – such as after a bonus – you can consider investing it in lump sum in the scheme where you have an ongoing SIP.
• Flexible planning: Revisit your investment plan when you have more funds or if your goals evolve.
• Monitor your investments: Track your investments periodically to see if the returns are in line with your expectations and goals. However, don’t give too much importance to short-term fluctuations or brief periods of underperformance.

Conclusion

Even Rs. 500 can be a good starting point and an important step towards potentially achieving your financial goals. By starting early and being consistent, you can build a habit of investing that can pay off significantly in the long run. After all, every journey begins with a small step.

FAQs

Is it safe to invest in mutual funds with just Rs. 500?

No investment is risk free. However, investors can mitigate risk by creating a diversified portfolio, choosing the right scheme type, and selecting a suitable investment horizon.

Can compounding help me grow my wealth faster?

Compounding is the phenomenon through which the returns your investment generates earn additional returns. This has the potential to resulting in a snowball effect over long periods. However, the return potential will be linked to market performance. Moreover, it is essential to maintain investment discipline and adopt a long-term approach to potentially get the full benefits of compounding. Compounding happens in both lumpsum and SIP. You can use a compound interest calculator to see the potential impact of compounding on a one-time lumpsum investment. You can also use a lumpsum investment calculator for such an estimate.

Why should you invest in Rs. 500 monthly SIP?

Starting small makes it easier to incorporate investing into your financial plan. As a result, even if you don’t have a significant sum to invest, you can get a head-start with a small investment and scale up when your disposable income rises. By investing a fixed amount regularly, you benefit from rupee cost averaging, which helps reduce the impact of market volatility. Due to the power of compounding, consistent investing through SIPs can potentially lead to wealth creation over the long term. SIPs instill financial discipline by encouraging regular investing.

What are the advantages of Rs. 500 monthly SIP?

Consistent investing over the long term, combined with the power of compounding, can help build wealth over time. By investing a fixed amount regularly, you benefit from rupee cost averaging, which helps reduce the impact of market volatility. SIPs encourage disciplined saving and investing habits.

Is it worth investing small amounts in mutual funds?

Investing small amounts in mutual funds offers several advantages, especially for beginners. The power of compounding allows even small, consistent investments to potentially grow significantly over time, while rupee cost averaging helps mitigate the impact of market fluctuations. Starting with small amounts also builds disciplined investing habits, reduces initial risk, and provides flexibility to increase investments as your financial situation improves.

How can SIPs help me achieve long-term financial goals?

SIPs (Systematic Investment Plans) offer a disciplined approach to long-term investing by averaging out costs through rupee cost averaging and providing access to small, regular investments. Over time, the power of compounding can significantly boost wealth-creation potential.

Can I invest Rs. 500 in any type of mutual fund?

No, the minimum investment amount depends upon the specific scheme and asset management company. However, there are several mutual fund schemes that do offer a Rs. 500 SIP.

How does investing Rs. 500 in SIPs work?

Investing Rs. 500 in SIPs involves choosing a mutual fund that matches your financial goals, setting up a recurring payment, and mandating your bank to deduct the amount each month. As you invest, the rupee cost averaging strategy will allow you to buy more units when the market is low and fewer when it's high, helping to average out your per-unit purchase cost over time. Your investment can potentially grow over time based on the fund’s performance and compounding returns.

Can I increase my SIP amount later if I start with Rs. 500?

Yes, you can increase your SIP amount at any time. The process will depend upon the mutual fund concerned company and you may need to end your current SIP and apply for a new one. However, the application process is quick and simple, especially for those who already have a folio or account with the mutual fund house. It can be done online in minutes. Some platforms may also enable you to modify the existing SIP.

How long should I invest with Rs. 500 to see meaningful returns?

Typically, a significantly long investment horizon will be beneficial to potentially see meaningful returns with Rs. 500, so that your investment gets market exposure over the long term and potential opportunities for compounded growth. Additionally, Rs. 500 SIP can be a good starting point, but you may consider increasing your investments over time.

Can I withdraw my Rs. 500 investment anytime?

Yes, you can withdraw your Rs. 500 investment in mutual funds at any time by redeeming units or stopping SIP contributions. However, withdrawals during market downturns may lock in losses, and frequent withdrawals can disrupt long-term compounding opportunities. Moreover, you may need to pay an exit load for withdrawals made before a certain period (such as one year). Be sure to check the mutual fund scheme’s documents or website for information about exit loads.

What are the tax implications of investing Rs. 500 in mutual funds?

The tax implications do not depend upon the investment amount. Capital gains (i.e, the difference between the per-unit purchase price and sale price) are taxable. Equity-oriented funds are subject to a Short-Term Capital Gains Tax (STCG) of 20% if sold within 1 year and a Long-Term Capital Gains Tax (LTCG) of 12.5%, along with an exemption of up to Rs. 1.25 lakhs, if held for more than a year. For debt funds, capital gains taxed as per your prevailing income tax slab regardless of the holding period.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.