Mutual funds are an investment vehicle for pooling funds from investors sharing a common investment objective. What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across asset classes and money market instruments. Depending on the nature of the scheme and its investment objective a mutual fund scheme may invest in company stocks, equity, G-sec, company fixed deposits, debentures, treasury bills, gold, real estate, etc. The performance of every mutual fund scheme depends on the performance of its underlying assets and the various sectors and industries in which it invests.
Mutual fund investors have the option of either making a one time lump sum investment or they can even start a monthly
SIP in mutual funds. Investors who make a lump sum investment usually end up exposing the entire investment amount to the market’s volatile nature. However, the introduction of the Systematic Investment Plan or SIP has made it possible for almost everyone to be able to invest in mutual funds and give themselves a chance of earning capital appreciation over the long term.
Here are top 10 reasons to start a SIP in mutual funds –
- A systematic investment plan is an easy and hassle free way to invest in mutual funds. Investors can invest small fixed amounts at regular intervals (usually every month) instead of making a lump sum investment.
- Investors must be KYC compliant in order to start investing in mutual funds via SIP. If you are a KYC compliant individual, you can start a SIP in mutual funds from the comfort of your home or office. All you need is a laptop or a smartphone with a decent internet connection and you can start a SIP in mutual funds by visiting the website of the fund house and navigating to the SIP page of a mutual fund scheme.
- Once you complete all the pre-investment formalities with the fund house and your bank and decide how much you want to invest regularly, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to the fund. One does not need to personally visit the fund house to invest their monthly SIP amount. Thanks to the option of auto debit, you automatically save a fixed amount every month.
- Investors can also refer to SIP calculator, a free online tool where they can get a rough estimate on the capital appreciation they might receive at the end of their SIP investing journey. For example, if you input how many years you wish to invest a fixed amount every month, the SIP calculator will give you an approximate figure, thus giving investors a fair idea about the corpus and wealth they can accumulate through systematic investing via SIP.
- If you are new to mutual fund investing and don’t have the knack of investing and saving, starting a SIP in mutual funds might inculcate the discipline of saving and regular investing.
- If you have long term financial goals like buying your dream home or if you plan to go on a world tour with your better half after your retire or if you are looking to build a corpus for your child’s education and their tuition, starting a SIP might help you gradually build a commendable corpus.
- Those who keep a long term investment horizon and invest in mutual funds via SIP, such individuals stand a chance of benefiting from the power of compounding and rupee cost averaging.
- Power of compounding which is derived from compound interest is another unique tool that can transform your small SIP investment amounts into a decent commendable corpus. When the amount you invested in a mutual fund scheme earns interest, this interest starts accruing interest of its own. This is referred to as the power of compounding and this snowballs into a never ending cycle of accruing interest until you decide to redeem your mutual fund units.
- Rupee cost averaging seems to also work in favor of SIP investors with a long term investment horizon. The monthly SIP amount remains stagnant, but the NAV of the scheme might fluctuate depending on the fluctuating equity markets. So, when the NAV of the equity mutual fund you invested in is high, lesser units are allotted. Similarly, when the NAV of that scheme is low, more units are allotted. This adjustment of allotment of units is referred to as rupee cost averaging and is known to minimize investment risk. Also, even when the markets are underperforming, investors benefit as they receive more units.
- Investors are free to stop their existing SIP if the mutual fund scheme is underperforming. Similarly, they can even increase the monthly SIP amount depending on their investment objective.
Systematic Investment Plan is flexible, thus offering a lot of benefits for mutual fund investors. However, investors are expected to consult a financial advisor before investing.
