When you are the owner of a small business, you have to be certain that not a single rupee spent on the functioning of the business goes waste.

When you are the owner of a small business, you have to be certain that not a single rupee spent on the functioning of business goes waste. That’s because when you are running a small business, there is a lot of cost cutting that needs to happen. Also, most small businesses run on rudimentary technology because they just can’t afford state of the art technology for running their operations. These small business owners do not always receive adequate funding from a bigger player. On several occasions, there is shortage of finances and this may hamper the smooth functioning of the small business. Basically, running a small business is a tough job. So all those who are involved in running small businesses, their goal should not be to just make their ends meet, but they should try and aim at building capital that may help their business sustain even in volatile conditions.

You cannot always depend on banks to sanction loans in case you have to get new machinery or plan on expanding your business. Although it is not entirely possible to single handedly sponsor every aspect of your business, it is always good to have a backup corpus which you can rely on if need be. But if you want to build a corpus over a certain period of time, you may have to start investing. But before you rush to any investment decision, ask yourself if you have considered financial planning. Financial planning is essential for every individual because it helps you manage money. Especially when you are running a small business, every penny counts and one has to make sure that their profit margins are higher as compared to their daily expenditures. The very first step of financial planning is identifying your short term and long term goals. Knowing your monetary goals may help an individual in prioritizing their investments. Having a defined set of goals may also motivate an individual to save enough so that they may begin investing soon. Also, when you are investing according to your financial goals, make sure that you also plan an emergency fund which might help you tackle emergencies that may occur while running a small business. For example if a pandemic strikes leading to a nationwide lockdown, your business is going to get affected but you still have to make sure that you are able to pay your staff. During such situations, having an emergency fund in your kitty will never do harm. You are also able to implement a strategy with a roadmap that may help you invest your money smartly.

But every individual is bound to certain investment restrictions that may vary depending on his or her risk appetite. Risk appetite is nothing but an individual’s ability to bear losses and wait patiently till the market normalizes and their investments start performing again. Everyone fears losing their money to market crash or market volatility and hence, everyone invests depending on their risk appetite. There are some people who are completely risk averse and it is completely understandable because who would want to lose their money when they are already living with a cash crunch? Such people may consider opting for conservative schemes that usually lower low fixed interest rates. However if you are one of those with an appetite for risk and do not mind pursuing schemes that have a high risk rewards ratio, you may consider investing in mutual funds.

What is a mutual fund?

Today, mutual funds are one of the most sought after investment tools which attract a large number of investors. SEBI (Securities and Exchange Board of India), the regulatory body of mutual funds here in India define them as, “A mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public”

For those who are completely new to mutual funds, let us help you understand them in a much easier way. What AMCs (asset management companies) and fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds in equity and other money market instruments like bonds issued by the government, debt securities, treasury bills, call money, certificates of deposits, commercial papers, etc. Mutual funds allocate assets as per the scheme’s investment objective and risk profile. The money is generally invested in the Indian economy across the industries and sectors. Mutual funds rely on their underlying assets to perform and some mutual funds like equity funds depend a lot on the performance of the underlying stocks in which they invest. Mutual fund investors receive shares in the form of units. Units are allotted to investors in quantum with the money invested by them and depending on the net asset value of the fund.

If you are a small business owner looking to invest in mutual funds, there are two investment options – you may either make a lumpsum investment or you may start a SIP. A lump sum payment is where one pays their mutual fund investment right at the beginning of the investment cycle. You may want to invest Rs. 5000. Rs. 10,000 or Rs. 50,000. Whatever it is that you wish to invest, you do so right at the start of your investment. One good thing about lumpsum investment is that you receive a large number of units in proportion to the investment amount. As the scheme continues to perform and its NAV improves, you may benefit from that. However, in lumpsum investment, your entire finances are exposed to the volatile nature of the market. Lumpsum investment is generally considered by investors who have a lot of cash sitting idle which they feel can be invested and put to better use.

However, if you are someone with a long-term investment horizon seeking long-term capital gains through systematic and regular investing, you may consider the option of investing in mutual funds via a Systematic Investment Plan (SIP). SIP is becoming the top choice of investors among all age groups and in India too, people are becoming more and more aware of investing in mutual funds via SIP. SIP is an easy electronic investment process and a feasible choice for anyone who wants to give their mutual fund investments a disciplinary approach. All you need to be is a KYC-compliant individual and you can start investing in mutual funds via SIP by just visiting the website of a mutual fund house. Nowadays a lot of third-party apps allow SIP mutual fund investments as well, but you may have to pay a commission to them. With SIP investments all one has to do is instruct their respective bank and every month on a fixed date, a predetermined amount is debited from your savings account and electronically transferred to the mutual fund.

There are two SIP investment choices for individuals – fixed SIP and perpetual SIP. As the name suggests, fixed SIP comes with a fixed tenure. An investor may or may not continue investing once the investment tenure is over. However, in perpetual SIP, there is no such concept as termination date. You can continue investing in perpetual SIP till your investment objective is achieved.

How can small business owners benefit from SIP investment?

Investing in mutual funds through SIP has its own perks. Here are some of the benefits of starting a SIP investment.

Power of compounding: If you start investing in mutual funds via SIP and remain invested for the long run, you may benefit from a powerful tool like compounding.

Rupee cost averaging: SIPs allow you to invest in small quantities which may allow one to benefit from rupee cost averaging. Investors are allotted units depending on the fund’s NAV. Suppose you invest Rs. 5000 every month and the NAV in the current is 10, you will be allotted 500 units. If the NAV goes down next month and becomes 5, you will be allotted 1000 units. Similarly, if the NAV goes up in the following month and becomes 50, you will be allotted 100 units. This way you benefit from rupee cost averaging.

Disciplinary investing: SIP investing might inculcate the discipline of regular investing. That’s because SIP investments are automatic and hence, once you begin your investments, you do not have to keep a tab on it every month. This easy and hassle free approach allows one to invest every month without any glitches or hindrances. The key to building a corpus is disciplinary investing and if you want to inculcate the good habit is regular investing, SIP may be the way to go.

These are some of the ways small business owners may benefit if you start a SIP investment. But remember it is better that you start early. The early you start investing the more time you have in hand to build a corpus. Also if you withdraw your SIP investments after a long time, your gains will be taxed as long term capital gains. Especially if you are planning to invest in equity funds, it is better to keep a long term investment horizon. That’s because equity investments are known to give desired results only when remained invested for the long run. Also, if you want to build a corpus you need to remain invested for the long run. Investing is a long journey, you cannot expect your money to grow overnight.

A lot of people are impulse buyers and sellers. This means they invest when the market is functioning normally but panic and withdraw if they witness slightest of fluctuations. Remember that investments like mutual funds need their own sweet time to grow. So you need to be patient with your money. Continue investing systematically via SIP. Your investments will not be able to beat inflation but they might be able to overcome market volatility as well. Usually, long term investments tend to not get affected by daily market fluctuations so it is better that you invest regularly and not worry about the market.

Also, before investing your money in any scheme it is advisable that you do some basic research about the fund. You can check the funds’ past performance and see whether it has been consistent performer. If possible invest in a mutual fund that has a proven track record and is a consistent performer.

If you are completely new to mutual funds and do not understand investing or financial planning, it is better that you seek the help of a mutual fund expert or a financial advisor who might be able to guide you in a better way and help you in diversifying your investment portfolio.

Mutual Fund Investments are subject to market risks, read all scheme-related documents carefully.