There was a time when fixed income instruments such as bank FD were the popular choice for investing money. The intention was to gain stable returns with less risk. However, that was also when inflation and purchasing power were better than the present. If you invest in a bank FD today, it will take you years to double that amount. Also, when you achieve the target, it is possible that inflation may reduce its value.
So, what’s the solution here? Well, you can invest in the equity market to gain returns at par with inflation. We are not recommending you to avoid any investment instruments, including bank FDs, but it is always better to expand your investment portfolio and include equity.
If you are new to the investment or equity market, you can start with slow and steady steps by starting a SIP, also known as the Systematic Investment Plan in mutual funds. This article will cover everything you need to know about starting a SIP in a mutual fund and how it works. So, let’s get started!
What are SIP mutual funds?
When you decide to invest in mutual funds, you have two options. The first one is to invest at once as a lump sum amount, i.e., Rs. 5,00,000 for 5 years in a mutual fund. The second option is to invest a fixed amount every month, i.e., Rs. 5,000 every month for 5 years.
The second option is called SIP. It is the most preferred way for most retail investors as they can save even a small amount and earn returns. In technical terms, a systematic investment plan is a fixed monthly investment in mutual funds which will earn you a return on the date of maturity. The maturity is decided by you; when you decide to withdraw money, it becomes your maturity date.
SIPs can also be done quarterly, semi-annually, or annually. However, monthly SIPs are the most popular option. You can start a SIP by investing a minimal amount of just Rs. 500 monthly. Also, you won’t have to always keep a constant watch on the market dynamics.
The main principle that you must remember about SIP mutual funds is that it is not a separate asset that you invest in but a medium to invest in mutual funds.
How do SIPs work?
You can select a SIP from various investment platforms available online. It can be a direct investment–direct SIP or via a third party–a regular SIP. Let’s understand this example. You have a SIP of Rs. 2000 every month, which gets deducted on the 5th of every month. If you have set up an automatic transfer, it will directly get deducted from your linked bank account, or else you have to manually make the payment.
Once the payment is made and if it reaches the mutual fund house by 3:00 pm on the same day, you will be allotted units of mutual fund for that same day’s Net Asset Value (NAV). If it is after 3:00 pm, you will be allotted the next business day’s NAV. Net Asset Value is the per unit price of a mutual fund. You can compare it with a per-share price.
When the NAV of a mutual fund increases, your SIP’s value increases, and that particular difference is your gain from the investment.
How to invest in SIP mutual funds?
The investment process for SIP mutual funds is as follows.
Decide the investment target
Before investing in any financial instrument, you have to define a particular investment goal. It can be to save for a car or a house; anything you want. Once you decide that, conclude an amount you will be able to contribute monthly comfortably.
Decide on a mutual fund
You need to find the mutual fund that matches your requirement in terms of goals, assets the fund invests in, the risk involved, charges associated with it, etc. There are N numbers and types of mutual funds in the market, from direct funds to hybrid and balanced funds. It is on you to select the one with the best suitability. Once you decide on a fund, also ponder upon the investment frequency you want to opt for.
Start investing in SIP
This step is crucial as you have to actually put in money and start investing. You can open an account with your broker for investing in mutual funds or can also opt for an “execution only” investing platform. Before investing, look after the charges, fees, and exit load levied by mutual funds.
What are the advantages of investing in SIPs
- Your investment averages: SIPs let you invest during different time phases at regular intervals. So, the chances are that you may invest when the market is at pick and also when it is at an all-time low. This results in your NAV sums getting averaged over your investment tenure, reducing your overall cost.
- Secured investment: Your SIPs in mutual funds are managed by fund managers known for their credibility and the ability to make prudent investment decisions. They have years of experience and tools you don’t have, and thus it is a safer option to invest in the equity market than stocks. Investing in SIP mutual funds means delegating your portfolio management to an expert.
The benefit of compounding: Compounding is an important factor that helps your money grow in SIP mutual funds. Because you get interest income on all your monthly investments, it gets compounded and reaps you better returns. Also, you can start with a small amount to make it big.
What is better: SIPs or lumpsum investment in mutual funds?
A lump sum investment in mutual funds requires you to make a one-time deposit. While for SIPs, you make periodic investments in fixed amounts. There is no prudent choice here. It depends on the amount you have in hand to invest. If you have the money and can invest in one go, you should go for a lump sum. However, make sure that you enter the market in better condition, i.e., when it is low, to get more units at a fair price.
If you do not have the resources to make a huge investment, go for SIPs. This won’t require you to study the market or keep track of it because the fund manager will do that on your behalf. The only important thing here is to invest in whatever manner you can.
Conclusion
Mutual funds are subject to market risk; thus, you need to have your own due diligence before making an investment decision. Compared to other equity investments, SIPs are safer and provide reasonable returns for you to keep your money afloat. You can easily invest a small amount for a long period and enjoy the upside with time. It is like investing the turtle in the race of turtle vs. rabbit.
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