Is SIP ideal for a ?know nothing? investor?

If you are keen on achieving long term capital appreciation, then you may have to start investing early. Most people realize the importance of investing when they are near the retirement stage. But the truth is, the early you start the better it is. Those who are aloof to the financial world feel that they might get cheated or might incur losses since they lack industry knowledge. However, there are certain investment avenues which even those who lack in depth knowledge about financial planning can still consider investing in.

Indians are quite familiar with mutual fund investments. They offer active risk management, invest across multiple asset classes like equity and debt, and also carry a diversified portfolio. Mutual funds hold the potential to offer capital appreciation if investments plan to keep a long term investment horizon and invest for at least 5 to 7 years. However, if you remain invested in mutual funds for 10 years and above, you may not even have to worry about the daily market movements. That’s because long term investments made in mutual funds may be able to overcome volatile markets as well. Also, those who invest in mutual funds for the long run, their investments might also stand a chance of beating inflation.

To achieve financial success savings isn’t enough. Investors need to invest a certain portion of their savings depending on their investment objective and their financial goals. However, investors are expected to balance their mutual fund portfolio with a mix of equity and debt depending on their risk appetite. One good thing about mutual funds is that you don’t need to be an industry expert or a connoisseur of equity markets to make investments in mutual funds. Even if you are a ‘know nothing’ investor, but have a clear set of financial goals, you may still be able to make an informed investment decision in mutual funds.

What mutual funds do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and international markets. The money is invested depending on the nature of the scheme.

AMCs offer investors with two investment options for their mutual fund investments – they can either make a lump sum investment or opt for a mutual fund SIP. However, when you make a lump sum investment, you expose your entire investment amount to the market's unpredictable nature, thus putting your entire investment amount at risk. However, if you wish to give your investments a systematic approach, you can consider starting a mutual fund SIP.

What is SIP? Why is it ideal for a ‘know nothing’ investor?

Systematic Investment Plan, abbreviated as SIP, is an easy and hassle-free way to invest in mutual funds. An investor doesn’t even have to visit the fund house to make an investment. He/she can do the same from the comfort of their home or office using a laptop/smartphone with a decent internet connection. However, you have to be a KYC compliant individual if you want to invest in mutual funds. There are several reasons why even those who do not have deep knowledge about finances can try investing in mutual funds through SIP. SIPs are convenient as investors do not need a large surplus in hand to make the initial investment. Investors can choose how much they wish to invest at regular intervals through SIP. Investing in mutual funds systematically through SIP may inculcate the habit of regular investing. Investors will also learn to save so that they can allot some portion of it to their monthly SIP. Every investor is emotionally connected to their financial goals. Their dreams, hopes and aspirations depend on these investments. And SIP may help them remain committed to these investments by reminding them monthly to make systematic investments without breaking the chain. If investors continue to systematically invest in mutual funds for the long run, they may be able to benefit from the power of compounding as well.

These were some of the reasons why even those investors who lack industry knowledge can consider investing in mutual funds via SIP. However, before investing their hard earned money in any type of investment scheme, investors are expected to do some background checks about the scheme. They must find out whether the scheme has given consistent returns in the past and whether the expense ratio levied by the scheme is feasible. They should also check how the scheme has performed compared to its peers in the past. This might help them get a perspective about the scheme also determine whether the investment objective of the scheme syncs with that of theirs.

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