When to Start Investing In Mutual Funds through SIP?

Mutual Funds are a unique investment that offers diversification and active risk management at the same time. These are professionally managed funds that invest across the Indian, USA and foreign economies. Asset Management companies who own mutual funds collect money from investors sharing a common investment objective. This pool of funds is later invested in India, the USA and other foreign economies. Mutual funds may invest in asset classes like equity and debt in order to generate capital appreciation. It is believed that the performance of a mutual fund depends on the underlying performance and progress of these assets, securities and economies is in which it invests. Mutual fund investors receive units in quantum with the investment amount and depending on the funds existing in NAV or net asset value. Market regulator SEBI (Securities and Exchange Board of India) have their own take on mutual fund schemes as an investment product -

'Mutual funds are a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document.

Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.'

What is Systematic Investment Plan?

Mutual Funds offer multiple ways for investors to make investment in these market linked schemes. The primary way to invest in mutual funds is to make a one-time lump sum investment. However when you make a lump sum investment you are exposing the entire investment amount to the market’s volatile nature, that too from the beginning of the investment cycle. A systematic plan on the other hand allows investors to make small systematic payments and regular intervals. Investors have the liberty of making small systematic investments that they are comfortable with, unless this amount aligns with the minimum investment amount mentioned in the offer document.

With SIP all you need to do is complete a one time and date with your bank after which every month on a fixed day a predetermined amount will be debited from your savings account and electronically transferred to the mutual fund.

When should you start investing in mutual funds via SIP?

If you are unsure about how much money is needed to invest systematically in order to get close to your financial goal then you can refer to an online SIP calculator. Most mutual fund advisors suggest investors to start investing in mutual funds via SIP at an early stage in their life. There are several benefits attached to early SIP Investments. If you have long-term goals like building a retirement Corpus for planning a destination wedding for your daughter or sending the children overseas for education then you need a large corpus which needs one to have an investment horizon of 15 to 20 years. Starting a mutual fund SIP early in life might help you build this corpus. In mutual funds, compounding refers to the interest on the interest garnered from the principal investment amount. However, compounding is known to only show its potential with long term investments. If you wish to witness your mutual fund investment multiply and turn into additional copies we can consider starting an early SIP. Investments made in equity markets are known to generate capital appreciation over the long term. Those who start investing at an early stage in their lives have a better chance of benefiting from compounding. Starting early allows investors to benefit from rupee cost averaging. When the markets are low more units are allotted. Similarly, when the markets are high and so is the NAV of the fund, lesser units are allotted to the portfolio of a mutual fund investor.

If you are a young investor who is keen on saving and building wealth over the long term, you can consider starting a mutual SIP at an early stage in your professional career.

Mutual fund investments are subject to market risk read all scheme related documents carefully.