Why investing in Mutual Funds through SIP is beneficial

Mutual funds collect money from investors and invest this pool of money in equity, debt bonds, government securities, and similar money market instruments. They can be option to diversify an investor’s portfolio and also allows them to invest in various assets with a very little surplus. Mutual funds offer the option of investing through Systematic Investment Plan (SIP). Invest in mutual funds through SIP has many benefits for investors. SIP investments are automatic and don’t require investors to manually pay their premium.

Today we are going to discuss what is SIP, the benefits of SIP and why should investors choose SIP while investing in mutual funds.

What is SIP and how does SIP work?

SIP or Systematic Investment Plan is one of the methods to invest in mutual funds. SIP allows investors to pay a fixed amount at regular intervals, generally every month, on a predetermined day. When an investor chooses to invest smaller amounts at fixed intervals instead of opting to pay the entire premium at the beginning of the investment cycle, they are minimizing risk and help their investment stay away from market volatility. In SIP a fixed amount is debited from your savings account every month and credited to the mutual fund you’ve invested in.

With an example let us understand how SIP works:

Say you want to invest Rs. 360000 annually in a mutual fund scheme but do not the entire amount at the time of investment. With SIP, you can invest Rs. 30000 every month and the amount will automatically get debited from your savings account and transferred to the mutual fund scheme.

SIP allows investors to start investing with an amount as low as Rs. 500. Investors can choose how much to invest and can also predetermine their intervals i.e. whether they want to invest monthly, quarterly or every six months.

Here are some of the benefits of investing in mutual funds via SIP.

• Investors are always looking for convenience while investing because they don’t have time to manually pay their investment premiums. When an investor chooses SIP, the amount automatically gets deducted from their bank account and is transferred to your mutual fund, thus making the premium paying process easy and hassle-free.
• Investors also benefit from Rupee Cost Averaging when they invest in mutual funds through SIP. This tool also allows investors to not worry about prevailing market conditions and allows them to invest in a risk-free manner. For example: - You have Rs.20000 to invest annually in a mutual fund scheme and you choose to invest via SIP. Your fund manager purchases 100 units priced at Rs. 10 for Rs.1000 in the first month. If the stock prices go up to Rs. 12 per unit, he’ll be able to buy around 83 units. But if the stock prices go down to Rs.8 per unit, your fund manager will purchase 125 units for you. Thus, SIP can help you to buy more units when the prices go down and increase your Net Asset Value.

Investing in mutual funds via SIP gives the investment a chance to grow steadily. It also lowers the burden on investors as they can pay small amounts and reap benefits of their investment in the long run.

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