Why Do Financial Advisors Insist On Starting A Mutual Fund Sip?

If you are someone who is willing to take some risk and invest in market related schemes and give yourself a chance to earn some capital appreciation through market linked schemes, you may invest in mutual funds. A lot of people argue that they do not understand how the market functions and hence are a bit sceptical about investing in mutual funds. But to invest in mutual funds you might not need to have in depth knowledge about the markets. Mutual funds do invest in equity, but they do not only invest in equity. Mutual funds are a pool of professionally managed funds. The fund house assigns a fund manager who implements an investment strategy to buy/sell securities in quantum with the investment objective of the scheme.

What fund houses do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy.. Apart from equity and equity related instruments, a mutual fund also invests in other asset classes like debt, corporate bonds, government securities, treasury bills, certificate of deposits, etc. Mutual fund investors are allotted mutual fund units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value). The NAV of a mutual fund may or may not fluctuate in tandem with the fund’s performance.

What is a mutual fund SIP?

Those who are new to mutual fund investments generally end up confusing mutual funds for SIP. That’s because SIP has become an integral part of mutual fund investments and this is why people are convinced that mutual funds and SIP are one and the same thing. It’s not. A Systematic Investment Plan or SIP is one of the modes of making an investment in a mutual fund scheme. Mutual fund houses generally offer two investment options for retail investors – they can either go the traditional way and make a lumpsum investment, or they have the option of opting for SIP. When you make a lumpsum investment in mutual funds, you are allotted more units in tandem with the investment amount and depending on the fund’s existing NAV. Also, when you make a lumpsum investment, you are exposing your entire investment amount to market volatility right from the beginning of the investment cycle.

A Systematic Investment Plan on the other hand gives you the opportunity to invest small amounts at regular periodic intervals (generally per month). An investor has the liberty to decide how much amount they want to invest in mutual funds through SIP. When you opt for a mutual fund SIP you can invest a predetermined amount on a fixed date of every month till your investment objective is achieved. The investment amount is auto debited from the mutual fund investor’s savings account and electronically transferred to the mutual fund.

Why do financial advisors insist on starting a mutual fund SIP?

Mutual funds do hold the potential to offer investors with capital appreciation in the long run. However, in volatile market conditions, a lot of investors fear losing their money and decide to withdraw their mutual fund investments prematurely. However, financial advisors believe that if one continues to invest in mutual funds systematically rather than worrying about the current market conditions and keeping a long term investment horizon, they might be able to get closer to their ultimate financial goal.

Investing in a mutual fund through SIP has its own perks. Firstly, you do not need a large capital in hand to start an investment in mutual funds. Secondly, investors get to choose an amount that they feel they can invest regularly over time without facing a cash crunch. When you start a SIP, every month a fixed amount is electronically transferred to your mutual fund from your savings account. Thus with SIP, only the amount that you invest is exposed to the market's volatile nature. Also, very few mutual funds come with a statutory lock in period. Which means that if the scheme that you have an SIP in isn’t performing as per your expectations, you can always withdraw your mutual fund units and invest in a scheme which you feel has the potential to offer better capital appreciation using an SIP App. Mutual fund investors are allotted units every month based on the fund’s NAV. Sometimes the NAV is low and other times it may rise. When the NAV of a fund is low, investors get naturally allotted more units. Similarly, when the NAV of the fund increases, investors receive lesser units in quantum with the investment amount. This is referred to as rupee cost averaging. Also, mutual fund investors do not have any obligations of holding on to their SIP investments. In case of an emergency, an investor may withdraw or redeem their mutual fund SIP and liquidate the scheme quite easily.

Remember that no investment whether conservative or modern like a mutual fund is entirely risk free. So if you wish to balance the risk of your investment portfolio, it is better that you follow a diversification strategy and invest in both equity and debt depending on your risk appetite.

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