Small or Big, SIP works for you

As written on: 15^th Dec 2020

Mutual fund schemes are ideal for long term wealth creation or for achieving long term financial goals like building a retirement corpus, securing your child’s future, planning a post retirement world tour or buying the dream home you always wanted.

SIP has become the primary mode of investment for most investors these days. That’s because it is an easy and convenient way to invest in mutual funds without having to personally visit the Asset Management Company or fund house to make an investment in mutual funds. Systematic Investment Plan, short for SIP, is a hassle free way to invest in market linked schemes like mutual funds especially if you do not have a large capital at your disposal to start investing. Also, if you are new to investing and wish to inculcate the discipline of regular investing, SIP might be the way to go.

Irrespective of how much amount you wish to invest in mutual funds, SIP can not only help you invest that amount to achieve your financial goals, but also help you earn some decent interest in the process. Thanks to the low minimum investment amount, individuals from almost all walks of life can invest in mutual funds via SIP.

SIPs are ideal to navigate through volatile markets as well, especially if your mutual fund portfolio majorly consists of equity schemes. We are aware of the fact that equity markets are highly volatile in nature and over the short term, there is a good chance of your portfolio incurring losses. This is why investors generally keep an investment horizon of minimum 5 to 7 years when considering an investment in mutual funds via SIP.

If you are a KYC compliant individual, you can start investing in mutual funds via SIP right away. Investors can invest using their smartphone or computer / laptop from the comfort of their home or office. Investors can choose a monthly SIP amount that they are comfortable investing. This amount should not be less than the minimum investment amount mentioned in the offer document. Once, investors complete a onetime mandate procedure with their bank, every month on a fixed date the pre-decided SIP amount is auto debited from their savings account and electronically transferred to the fund. Mutual fund investors are allotted units in quantum with the investment amount and also depending on the fund’s existing NAV.

Small or Big investment amount, SIP generally works in your favor

Whether you have short term financial goals like renovation of your home, planning a short vacation, making the down payment of your new car or long term goals like building a wedding corpus, building an emergency fund to remain financially secured in your golden years, saving so that you can send your daughter abroad for post-graduation, SIP might help you achieve either of these goals. This means that whether you want to achieve a small amount like Rs. 5 to Rs. 7 lakhs or wish to accumulate a corpus worth Rs. 30 lakhs to Rs. 50 lakhs, with SIP these goals might be achievable.

One of the biggest advantages SIP investors hold is that they stand a chance of benefiting from the power of compounding. In mutual funds, the term compounding refers to the interest earned on the interest earned from the principal investment amount. Whenever the mutual fund scheme you invested in earns capital appreciation, instead of withdrawing if it is reinvested back in the scheme, over the long term this may growth into a decent corpus. Compounding works only when investors do not prematurely withdraw their investment amount is generally compatible for those with a long term investment horizon.

Thanks to yet another important tool like rupee cost averaging, SIP investors have the chance of minimizing risk from volatile markets. When the markets are low and so is the fund’s NAV, more units are allotted to an investor’s portfolio. Similarly, when the NAV of a scheme is high, less units are mutual fund units are allotted. This adjustment of units depending on the NAV is referred to as rupee cost averaging. Also, since there is no upper limit on monthly SIP investment amount, investors are free to invest as per their income needs and long term investment objective.

If you are new to investing and aren’t sure as to how much you must invest at regular intervals to target the desired financial goals, investors can also refer to free online tool like SIP calculator. This calculator is designed to give investors a rough estimate of the corpus they might achieve if they continue to invest a certain amount in mutual funds for a stipulated time.

Having said that, investments in mutual funds do not guarantee capital appreciation. Also, there is a good chance of you losing out on your principal amount in volatile markets. Hence, it is better to consult a financial advisor before investing.

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