Everyone has dreams and aspirations. For you it may be a new dream car, a bigger apartment, exotic foreign vacation and so on. It is only possible to achieve your dreams when you work actively towards them. Investing in mutual funds via Systematic Investment Plan (SIP) can be a simple yet powerful way to help you achieve your goals. So,let’s have a clear-cut understanding of mutual funds and how SIP can benefit and work for you.
What are Mutual Funds?
Mutual funds are financial instruments that are formed by pooling money from numerous investors and managed by a fund manager. An interval mutual fund is made up of portfolios of equities or bonds or hybrid securities of which unit holders have ownership in the form of net asset value (NAV). Mutual funds are managed by professional and experienced money managers who take investment decisions on behalf of investors in return for a handling fee.
What is a SIP?
SIP stands for Systematic Investment Plan and it is an investment mode through which you can invest in mutual funds. SIP is a systematic method of investing a fixed amount of money in mutual funds periodically. The time frame can be monthly, quarterly, semi-annually, annually etc. Investing in SIP mode in mutual funds can help you achieve your dreams and financial goals in a profound manner.
We have identified certain benefits of investing in mutual funds via SIP. They are as follows:-
Disciplined and Focused Approach: Investing in mutual funds via SIP is a highly disciplined and a focused approach towards wealth creation in the long run. If you continue SIP for a long term, then you get to invest in the fund during the highs as well as lows. You don’t need to time the markets while following this approach. Market timing can prove to be a very risky proposition for you, especially if you are a novice. SIP approach helps you to remove this factor of unpredictability. Having decided on the investment tenure and frequency, you can choose to automate your investments. You can give a standing instruction to your bank to transfer the amount directly from your bank account into the mutual fund SIP of your choice, on a fixed date (may be every month/quarter or semi-annually/annually). It is a focused and disciplined way to create wealth in the long term.
Power of Compounding: When you invest regularly through SIP, your returns earned on investments also gets invested. This factor may look simple but it can increase your potential returns multifold. Compounding has been termed as eight wonders of the world. Most ideal way to get benefit out of compounding is to keep investing for an extended period. The simple example of such would be Warren Buffet, whose investments return around 22% annually, while Jim Simons (Medallion Fund) another legendary investor generated around 66% annually. However, Jim Simon’s net worth is almost one-third of that of Buffet’s. This vast difference is mainly due to the fact that Buffett (in the 90’s now) started investing at the age of 10, while Simons started investing at the age of 50 (in 80’s now). So, it is important to start early if one wants to create sizable wealth, so that the power of compounding comes into play.
Rupee-cost Averaging: It is a concept where you purchase more/higher units when the Net Asset Value (NAV) of the fund is low, and lesser units when the NAV is high. This factor helps you average out your purchasing costs over the tenure of the investment period. You don’t need to worry about market timings and the risk associated with it. Rupee-cost averaging is one of the pivotal characteristics that has made the SIPs quite popular in the modern world.
Convenience and Efficiency: SIP is one of the most convenient and efficient ways of investing your money in mutual funds. SIP allows you to invest with your limited earnings on a regular basis. Even if you have Rs 500 for investments, you can start your SIP with your choice of the mutual fund. It helps you to set aside your worry of large capital for investments. With the SIP step-up function, you may raise your monthly investment amount as your income rises. Like most investors, you may not have the time and expertise for extensive market research and analysis to adjust or balance your portfolio. So, once you pick a fund as per your risk appetite and can give standing instructions to the bank and let the SIP take care of your monthly investments.