Mutual Funds: Why Should you Invest in SIPs
Discover the benefits of investing in mutual fund SIPs (Systematic Investment Plans). Find out how SIPs can diversify your portfolio, reduce risk, and yield higher returns.
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Over the years, more and more people are leaning towards Systematic Investment Plans (SIP) because of their accessibility. A SIP in a mutual fund is perhaps the simplest way to achieve your goals, like buying a new house, a new car, or an exotic vacation.
Getting yourself a SIP can help you reach those goals that might seem impossible otherwise. The earlier you start investing, the more your earning potential will be. Let’s understand how to start your stock market investment journey through SIPs.
What is SIP?
The term SIP is widely used in the context of mutual fund investments. A Systematic Investment Plan (SIP) is an investment method in mutual funds where you pay a fixed instalment at regular intervals (such as monthly or bi-monthly) over the tenure of the investment. This could be seen as an alternative to lump sum investment where the investment amount is upfront.
Systematic Investment Plan (SIP): Explained
A SIP is particularly useful if you are new to investing and wish to save every month for a particular goal. Opting for SIP over lump sum investments has many benefits for an investor. Not only do SIPs have the potential to fetch maximum returns, but they also protect your investment from short-term volatility and ensure investor interest.
What are the major benefits of SIP?
There are many reasons why investing through SIP is beneficial for investors seeking to build a large corpus over the long term.
# Start with a small amount: A mutual fund SIP is so convenient that it appeals to a wide array of investors. A SIP can be started with as low as Rs.500 per month and can be increased gradually over time. While investing through SIP, you will enjoy complete flexibility, making it much easier to start than most other popular investment tools.
# Benefit from compounding: The power of compounding allows your money to grow exponentially over the long term. It fetches returns on your principal investment returns, meaning the return on your principal investment gets reinvested into your actual investment.
# Suppose you invest Rs 10,000 in a bank, and the rate of interest is 10%. You want to invest for 3 years. In the first year, you will get Rs 11,000, Rs 12,100 (2nd year), and Rs 13,110 (3rd year), consecutively. Here an investment of Rs 10,000 fetched you a return of Rs 3,110 in just 3 years.
# Like this, the power of compounding can grow your corpus manifold in the long-term. This is particularly beneficial for those who start investing early as their investment will get more cycles of compounding interest.
# Rupee cost averaging: Rupee cost averaging is a concept in mutual fund investment where you get more units of the fund when the Net Asset Value (NAV) is low and fewer units when the NAV is high. This averages out the overall purchasing cost over the tenure of investment and is among the long-term benefits of SIP.
# Let us understand this with an example: Suppose the NAV of a mutual fund is Rs.50. You invest Rs.5000 and buy 100 units. Now the NAV has gone down to Rs.40, and for Rs.5000 you will get 125 units. This averages out the cost of those 225 units, so each unit will now cost you Rs.10000/225 units, i.e., Rs.44.44.
# Brings Investment Discipline: Investing through SIP helps investors to be regular and disciplined so they do not get intimidated by market volatility. It also helps individuals to stick with their investment plan by investing a fixed amount every month until they reach their goal.
SIP vs. lump sum investment: Which is better?
While both investment methods have their merits, SIPs in mutual funds offer a more disciplined approach to investing with benefits like rupee cost averaging and compounding returns. On the other hand, lump sum investments can yield a higher return if invested at a lower level. Thus, which one can give better returns depends on the market phase.
Advantages of SIPs for Beginners
There are several advantages of SIPs for beginners and new investors in the stock market. Remember these tips for a well-rounded investment strategy:
Starting with equity mutual funds through SIPs opens the door for long-term growth and higher returns. For a more stable return, one can invest in debt mutual funds.
Choosing a flexi-cap mutual fund is a great SIP investment strategy that will help in the diversification of your portfolio.
Monitor SIP returns at frequent intervals to ensure they align with your financial goals and step up your investments as needed.
How to Select the Best SIP Plan?
Create a comprehensive SIP investment plan that includes your financial goals, investment horizon, and risk tolerance.
Understand growth opportunities and the risks in the funds you’re looking to invest.
Compare mutual funds by analysing the SIP returns using online SIP calculators to estimate your potential returns and plan your investments effectively.
Research about the best SIP plans that align with your investment goals, timeline and risk profile.
Importance of SIPs in Mutual Funds
When you start investing early, your money gets more time to grow. The same rule applies to mutual funds SIP as well. Starting early always provides a better chance to build a large corpus over time than those who start late. Investing in SIPs gives you the freedom to invest according to your financial goals both for the short or long term and calibrate it over time.
How to invest in Mutual Funds SIPs:
Nowadays the process to invest in SIPs in mutual funds requires just a few steps. These steps are as follows:
Open your brokerage website or mobile app and enter your login details.
In the investment category, select Mutual Funds and then Systematic Investment Plan (SIP).
Select the fund you wish to invest in and then select SIP near the scheme name.
Choose "Start SIP" - enter frequency, duration, and start date.
Select the SIP instalment, then confirm and review the investment details.
Accept the terms and conditions and place your order.
Summing Up
Starting a SIP is the easiest way to enter the world of investing. Mutual fund investments certainly have risks, but when invested for a long period of time, these are balanced with diversification and rupee cost averaging. Make sure to know the tax implications, expense ratio, and exit load of mutual funds before making any kind of investment decision.