Most financial advisors have observed that when an investor first starts to invest in mutual funds, they lack the discipline of investing regularly. Another concern while investing in mutual funds is the myth that you need to have a lump sum amount of money while investing. To help address these concerns, a systematic investment plan (SIP) was introduced.
With a SIP, you don't have to worry about spending large amounts of money in a mutual fund all at once - you can start with as little as Rs.500, and because the plan allows you to invest on a schedule that suits you best, you can learn to invest at periodicals and inculcate a habit. This article outlines everything you need to know about a systematic investment plan and what mutual funds are best for a SIP.
A systematic investment plan is a way to invest in mutual funds at a pace that suits the investor. This means you can invest as little or as much as you want, you can choose to invest at specific periods viz. daily, weekly or monthly and you can instruct your bank to auto-debit your investment, so you don't miss a single investment. Let's understand this a little in detail.
An essential factor to remember while investing using a systematic investment plan is that a SIP helps with the averaging cost return ratio. Because the equity market is known to be uncertain and volatile, you have the advantage of purchasing more units when the price of the share is low. Investing using a systematic investment plan also allows you to garner more stocks that are priced at a lower sum in comparison to investors who prefer investing in a lump sum.
Let's look at another factor why a systematic investment plan is a preferred route for most novice investors. Any amount of money invested by you will get compounded and will fetch you a decent amount in returns. So the more disciplined you are while investing in mutual funds, the longer you remain invested and higher the number of profits.
If you have apprehensions regarding investing large amounts of money, do not worry. A systematic investment plan doesn't cut a hole in your pocket when you invest; in fact, you can invest as low as Rs. 500, so that the amount doesn't feel like a burden. You can also increase the amount you invest in a mutual fund by starting a new SIP; this means you can have multiple systematic investment plans as you start to become a seasoned investor.
Once you start investing using a systematic investment plan, you can instruct your bank to auto-debit the amount so that you do not miss out on your investments. But this leads to another question. What if you don't have the proper funds to invest in a particular month because of an emergency? You can pause the systematic investment plan and start again when it is convenient.
This article is not going to tell you which specific mutual fund you should invest in because each individual and their investment plan is unique. But we can outline how you must decide whether a systematic investment plan is the right way to go while investing in a mutual fund.
Whether you must go down the SIP route is dependent on certain factors like your investment goal, the credibility of the fund house or the asset management company managing the fund, the performance of the fund and the expense ratio.
The objective of your investment is a factor that determines if you must use a SIP route. If you have a goal that can be achieved over a longer period, you might as well choose a systematic investment plan to ensure you regularly contribute to that objective. A short-term target, like a family vacation or buying a car, doesn't require too much discipline, you could invest in debt or money market funds to achieve this goal.
The fund and the fund house also factor in while choosing the correct mutual fund for investing through a systematic investment plan. A credible fund house or asset management company will always employ seasoned fund managers who are more than capable of handling large amounts of money. So if they offer investments through systematic investment plans, you can consider taking the route.
Finally, the expense ratio of the fund also helps you decide whether or not you should choose a SIP. While the cost of entry and exit loads is relatively small, it has the potential to make quite the difference when you withdraw from the fund. So if the exit load is higher if you are investing using SIP, it might be better to invest using a lump sum and vice versa.