A lot of investors are now moving away from conventional schemes like bank fixed deposits and public provident funds because they have realized that the fixed interest which these schemes are offering is nothing compared to what they can earn by investing in market linked schemes like mutual funds.
Mutual funds are a pool of professionally managed funds that invest in a diversified portfolio of securities depending on the nature and investment objective of the scheme. For example, a bluechip fund will aim at generating long term capital appreciation by predominantly investing in equity and equity related instruments and stocks of large cap companies. On the other hand, a gilt fund which is a debt fund will avoid investments in equity markets and instead invest in government issued bonds and securities to generate stable returns whilst offering capital protection to investors.
Each mutual fund scheme serves a different purpose and investors must ensure that have a clear understanding of where and how much they want to invest. Investors, irrespective of whether they invest in an equity fund or a debt fund can do so through a Systematic Investment Plan.
Today we are going to discuss SIP and key reasons to invest in mutual funds via SIP.
What is SIP?
A Systematic Investment Plan or SIP is a simple and effective way to build a wealthy corpus over the long term by investing small, fixed sums periodically in mutual funds.
Here are the key reasons to start a monthly SIP in any mutual fund scheme of your choice:
Invest an amount of your choice
Through SIP, one can invest an amount as low as Rs. 500 per month in mutual funds. This is a good option for those who do not have a large surplus and wish to invest small sums regularly. The only catch here is that investors cannot invest an amount lower than the minimum SIP investment sum mentioned in the SID (Scheme Information Document).
No upper limit
Although a lot of investors will be considering starting their SIP journey with small sums, investors must know that there is no upper limit on SIP investments. This means that investors can invest any sum as per their risk tolerance and investment objective. This concludes that a monthly SIP can be or Rs. 500 or Rs. 5 lacs or even more, depending on the corpus that you want to achieve in the long run.
Rupee cost averaging
In the long run, SIP investing allows investors to buy more units through an investment technique referred to as rupee cost averaging. What this does is that it averages out the total cost of purchase, thus maximizing one’s gains and minimizing their total investment sum. When the NAV of the mutual fund scheme is low, an investor can buy more units from their SIP sum. Similarly, when the NAV is, investors buy fewer units. Since the NAV of the scheme is bound to fluctuate from time to time, in the long run, one may be able to buy more units and reduce the average cost of purchase of mutual fund units.
Power of compounding
When remain invested in the long run, SIP investors may even be able to witness the power of compounding. Compounding in mutual funds only seems to come into effect when the individual investor not only earns interest on their principal invested sum but also on the interest that keeps getting added to the fund over time.
Apart from this, there are no penalties for starting or stopping one’s monthly SIPs abruptly. This makes them an ideal investment option for investors of almost all professions and income slabs.
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