In the last few years, mutual funds have caught the attention of eager investors, and their numbers are steadily growing. This is because mutual fund offers its investors relatively higher returns compared to traditional investment options such as fixed deposits, gold, etc. There are two ways to invest in mutual funds, namely lumpsum and Systematic Investment Plans (SIPs). Experts suggest investing in SIP to create long term wealth.
The article can help you understand how to benefit from investing in mutual funds via SIPs.
Benefits of SIPs
SIPs allow you to invest small amounts at regular periods. These intervals depend on one’s financial affordability and could be weekly, monthly, quarterly, bi-annually or annually. Since SIPs give you the option of entering the market at different levels, you can gain from market highs and lows. When the market is low, you get more units automatically. Conversely, when the markets are high, you buy fewer units.
Let us understand this with the help of an example.
Say, you have set up a monthly SIP of Rs.10,000. When the Net Asset Value (NAV) is 20, you buy 500 (10,000/20) units. If the market hits a low and the NAV falls to 16, your SIP gets you more units, i.e. 625 units (10,000/16). This can help average your purchase cost in the long run.
How do you gain more by investing via SIPs?
In the above example, if you sell your investments, the original units could be worth the same price. However, your profit margin could be higher for the units you purchased at a lower price when the markets were weak. So, overall on the entire chain of investments, your average purchase cost is lower compared to investing via the lump sum route.
Another benefit of investing via SIPs is the low investment amount. You can start investing for as little as Rs.500 and gradually increase the SIP amounts later on. Also, consistency plays a prominent role in helping you achieve your financial goals. In some cases, investors stop investing when the markets take a hit. With SIPs, investing becomes a part of your financial budget. You get in a regular habit of investing and automatically cut down on unnecessary expenditure to save for the SIP instalment each month.
Lastly, the power of compounding helps create a substantial corpus amount. As you continue investing for long-term purposes, your money continues to multiply. With this corpus, you can meet your individual goals, such as your child’s marriage or purchasing a property.
Thus, if you are looking to invest in mutual funds, the ideal time is now. You can start your mutual fund investment journey by reading fundamental concepts such as ‘what is a mutual fund’ and how to invest in SIP. Once you are familiar with how it works, you can set up an auto-debit facility that automatically deducts the SIP from your account.