Find out why a Systematic Investment Plan remains the best way to invest in mutual funds
As investments have grown in popularity, more and more people want to move past the old school thought of simply saving funds in fixed deposits or a savings account, and instead enter the world of investing, where returns are higher and one can achieve their long term goals comfortably. One such mode of investment that people today are drawn towards is mutual fund investment.
Mutual funds are nothing but a collection of investments from different investors that are pooled together to form a corpus. This pooled amount is then invested by a mutual fund manager in various portfolios like the equity market, debt funds and other money market instruments. Over a long term, the investors’ contribution generates healthy returns and every investor has the potential to amass a significant fund to fulfill their goals.
Now there are two ways by which one can invest in mutual funds. Any investor can approach an AMC or Asset Management Company and invest a lump sum amount of their choice into the mutual fund of their choice. This is a one-time payment and the investor can keep investing any amount that he or she wishes at any time.
The second method of investing is via SIP , or a Systematic Investment Plan. A systematic investment plan is a way of investment where an investor can invest a fixed amount of their choice into mutual funds at regular intervals. This way, you can invest a small amount every month and build your fund over a long term.
Investing in mutual funds via SIPs instead of going for the lump sum way has the following benefits.
Unlike stock market investment or mutual fund investment via lump sum investing, SIPs allow investors to bring some discipline into their investment plan. Every aspect of the mutual fund, like the date of investment, the amount, the chosen portfolio etc. are set beforehand. Once you have set the SIP you can simply forget about it since the investment will carry on every month on its own without you having to remember to invest or skip an investment by mistake.
Not everyone is willing to invest a large, one-time, lump sum amount into mutual funds. What most of us can do, however, is keep investing smaller, more convenient amounts at regular intervals into top mutual funds for SIP. This is the key advantage of SIP, which can be initiated with an investment of as little as Rs. 500. This amount can be changed at any point; the SIP can be stopped and the amount redeemed. This kind of flexibility makes SIP one of the most popular ways of investment for the common man.
When investing in mutual funds directly, or in the stock market, one needs to time the market cleverly, that is enter the market when costs are low and exit when costs are high. To predict the behavior, of the market is almost impossible and no one actually knows how to time the market. With SIPs, however, since you’re investing regularly irrespective of how the market is behaving, you have the advantage of averaging out your costs. Your fixed investment will automatically get you more units when the market is down and lesser units when it is up. Thus, you will not see the effects of short-term fluctuations of the market on your investment since it will all average out in the end.
This is probably the biggest advantage of investing in mutual funds. The power of compounding allows your investment to grow exponentially over a long term. How does it work? It’s simple. A mutual fund SIP doesn’t just invest the principal amount every year. Naturally, your principal amount will generate earnings in a year. Rather than investing the same principal amount the next year, what a mutual fund does is add your previous year’s earnings to the original amount and then invest this new principal amount entirely. This means that every year your principal amount will keep on increasing, and over a long term, your original investment will have grown to a sizable corpus.
Thus, the above benefits clearly indicate that investing in mutual funds via an SIP is the best way for regular investors. Not only does it provide an opportunity for the common man to start building wealth, but it also provides new investors the confidence to participate in an investment where the risk is considerably lower than direct stock market investing. So simply choose the best SIP to invest in and start your investment journey today!