How Young Investors Can Take Advantage Of Systematic Investment Plan

Young earners have realized the importance of investing. They know that savings alone cannot help them overcome inflation. There is a need to invest a certain portion of their regular earnings in a feasible investment scheme. And that scheme can be mutual funds. Mutual funds are gaining popularity for their ability to drive in the alpha in the long run. Of course, they do not offer guaranteed returns but have the potential to outperform fixed interest offering instruments.

Mutual funds are a pool of professionally managed funds that are actively handled by portfolio managers with vast experience. Mutual funds collect finances from investors and utilize the pool of funds to buy securities, bonds, and other money market instruments. They diversify their portfolio across asset classes, currencies, gold, and even international markets. Since mutual funds offer so much diversification, they mitigate investment risk over the long term.

Young investors should consider investing in mutual funds through the SIP route. Not only does SIP investing inculcate discipline, but it might also help an individual gradually build a sizeable corpus.

Let us find out more about SIP and why one must consider investing in mutual funds through SIP.

Systematic Investment Plan in Mutual Funds

When investing in mutual funds, investors have the option of either making a lump-sum investment or choosing the SIP mode. Systematic Investment Plan (SIP) is an effective way to invest small, fixed sums at periodic intervals in mutual funds. Investors can decide how long they wish to continue their SIP investments as these do not have a lock-in period. One can start or stop their SIPs at any given time. They offer great flexibility for investors.
The primary reason for SIP to be an ideal investment route for young investors is that they can invest an amount as low as Rs 500 every month in mutual funds. However, to know the minimum investment sum of a mutual fund scheme, investors must refer to that particular mutual fund’s Scheme Information Document (SID).

Let us give you an example of how the Systematic Investment Plan works in mutual funds-

Rohini wants to start a SIP of Rs 10,000 in a large cap fund. She wishes to invest this sum for at least 12 months. Let us assume she starts his investment journey in January. Now do understand that even though the SIP sum remains the same, fluctuations in the fund’s NAV (Net Asset Value) could affect the allotment of the units.

You can clearly see that the NAV that stood at Rs. 10 in January fluctuated throughout the investment duration and now stands at Rs. 35 in December. Since Rohini was regular with her monthly SIP investments, her average purchase cost per unit is –

10000/8002.36 = Rs. 1.24.

Thanks to the rupee cost averaging technique, Rohini managed to average out the total cost of purchase of units. Anytime an investor manages to reduce their overall cost of investment, they are on the path towards maximizing the total yields.

Investing in mutual funds through SIP makes much more sense than trying to time the market because –

• There is no such defined formula that can determine a market crash.
• It is impossible to predict the buying/selling behavior of sellers, which is actually a very large number.

Instead, investing in mutual funds through the SIP route is so much simpler and doesn’t feel heavy on the pocket either as you decide the sum of your choice and invest it regularly for a specific duration till your investment objective is accomplished.

It is natural for young investors to be curious about the potential wealth they can create through regular SIP investments. For that, they can use the SIP calculator, a free online tool. Using this tool, one can determine the total assumed returns that their investments may fetch at the end of their SIP investment journey. However, the SIP calculator is a simulation that does not take certain factors like expense ratio and exit load into consideration. Hence, the illustrations displayed by the calculator may vary from actual returns.

The journey to long term wealth creation can be successfully accomplished through SIP investing. Investors are requested to reach out to their financial advisor to make an informed investment decision.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.