Is Investing in Mutual Funds via SIP a Good Option?

As written on 12^th Feb 2021

It's 2021, and if you still haven’t got your hands on investing, it is best that you do not delay it any further. Now, if you are short on money or facing any financial crisis, that’s a different thing altogether. But, if you have capital that is sitting idle, you can always put it to better use by investing in schemes that offer potential for growth. Do not ponder over whether you are ‘too young’ or ‘too old’ to invest. The earlier you start, the better it is, especially if you are investing in mutual funds.

This is because mutual funds are a pool of professionally managed funds that invest across multiple asset classes including equity. Investments made in equity markets take some time to show their true potential. Hence, if you are keen on seeking long-term capital appreciation through investments in equity-oriented schemes, it is advisable to start early. Mutual funds have gained traction among Indian investors in the recent past and are slowly attracting the attention of more and more individuals. They offer active risk management, offer a diversified portfolio, and the scope for long-term capital appreciation.

However, you must first make a financial plan to determine your short-term and long-term goals. Once you know what you want to achieve with your investment, you need to determine your risk appetite. This is because various categories of mutual funds invest in equity and equity-related instruments, which carry relatively high risk. Further, you may be aware of the fact that investments made in financial markets do not guarantee returns. Hence, investors should understand their risk appetite before investing in mutual funds.

Fund houses collect money from investors for specific themes and invest this pooled money in instruments based on the scheme objective. The money is thus invested across various securities depending on the nature of the scheme. Mutual fund investors are then allotted units as per their investment amount and the fund’s existing net asset value (NAV).

Investing in mutual funds via SIP, short for Systematic Investment Plan, has become quite popular. However, the term SIP and mutual funds are interchangeably used and several investors tend to confuse them to be one and the same thing. The fact is just like you have the option of making a one-time or lump sum investments in mutual funds, you can also invest in mutual funds using a Systematic Investment Plan .SIP is an easy and convenient way to invest in mutual funds, wherein you invest small amounts in mutual funds regularly. What’s more, investors can invest in mutual funds via SIP using a laptop or smartphone with a decent internet connection. Instead of making a lump sum investment and exposing your entire finances to market volatility, you can invest small amounts in mutual funds via SIP at regular intervals, thus making the most of market ups and downs.

Here are some of the reasons why investing in mutual funds via SIP is a good option:

You can choose the monthly investment amount

The mutual fund offer document will have the minimum SIP amount mentioned. Depending on your risk appetite and investment objective, you can decide the SIP amount.

You can stop the SIP anytime

Remember that even if you invest in a mutual fund that comes with a lock-in period, you do not have to continue investing in that fund till the lock-in period is over. The good thing about an SIP investment is that you can stop the SIP at any point of time. There are several factors that may lead an investor to stop an SIP. For example, if the fund you have invested in is not performing as expected, you can stop the SIP investment in that fund and invest in some other fund that may have the potential to perform better.

You can modify the SIP amount

The beauty of an SIP investment is that it allows investors to increase or decrease their monthly SIP amount. Suppose the fund you are investing in is delivering returns that are way beyond your expectations and you wish to invest more on a monthly basis, you can easily do so by modifying the monthly SIP amount. Similarly, if you want to invest in a new fund and wish to divert some amount to that fund, you can even decrease the monthly SIP amount.

SIPs may inculcate the discipline of regular investing

Once you start a mutual fund SIP, a predetermined amount is deducted from your savings account every month and electronically transferred to the fund. This way, SIP is automatically saving a portion of your monthly income and also helping you to systematically invest in mutual funds from the comfort of your home or office. Thus, you end up saving first and spending later, something that is essential for becoming financially sustainable.

We have seen some of the reasons why one may consider investing in mutual funds through SIP. However, if you need further assistance in making an informed investment decision, do consult a financial advisor.

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