Top 8 Reasons To Start a Mutual Fund SIP Now

Do you want to create wealth but don’t know where to start? Stop worrying because a Systematic Investment Plan (SIP) is a good starting point for building wealth over the long term.

There are two ways to invest in mutual funds: Lumpsum and Systematic Investment Plans (SIP).

Lumpsum: Lumpsum allows investing in mutual funds in one go. It means you can make a one-time investment. On the other hand, SIPs will enable you to invest your money periodically, say monthly, quarterly, or half-yearly.

SIP: SIP’s complete form is a Systematic Investment Plan. A SIP is a simple method that allows you to invest in mutual fund schemes regularly. You need to pay a fixed monthly amount and see the magic of compounding after a few years. It is like a recurring deposit where you can invest a small amount regularly. It is one of the most influential stock market investment strategies. Regular and consistent investments benefit in risk reduction and higher returns.

Despite the market’s volatility due to the Russia-Ukraine war, a spurt of crude oil prices, or even skyrocketing inflation, investors have not deflated their confidence in the Indian stock market. According to the Association of Mutual Funds in India (AMFI), the total amount collected through SIP in October 2022 has crossed the Rs 13000 crore mark.

Benefits of Systematic Investment Plan(SIP):

Most investors prefer SIP over the lumpsum investment, here are the reasons:

1. Financial Discipline

To become financially secure, you need to be a disciplined investor. To be disciplined in investing, you need to hold your investments for the long term, keep your emotions out, and be invested in all the market conditions. Stock market investors often begin their journey but fail to invest regularly due to a lack of discipline and failure to realize the benefits. In SIPs, your money will automatically be invested in the mutual fund scheme of your choice every month. All you have to do is decide how much you want to invest each month and the date. Consistency is the key if you want to accumulate wealth.

2. A Low-Cost Investment

You could think investing in stock markets requires a large sum of money, but that’s not true. SIPs can be started with as little as Rs 100 per month, which is easily doable even if you earn less. You can always increase the amount of SIP as your income rises. Even if you are a student or homemaker or do not earn much salary, you can take advantage of investing a small amount every month and creating a large corpus in a few years.

3. Fund Manager Expertise

Expert investment professionals, known as Fund Managers, handle the mutual funds. They evaluate the performance of different securities in the market and decide which one to buy or sell. Aside from extensive subject knowledge and broad insights, fund managers gain invaluable insights from their research team. Therefore, you need not worry about market fluctuations or researching the stocks.

4. No Need to Time the Market

It is impossible to time the market regularly. You have the incredible advantage of not having to worry about market volatility. Also, finding the right time to enter the market will require continuous tracking of markets – which is not an easy task. But do not worry, with SIPs, you need to invest a fixed amount every month and continue investing till the end of the tenure.

5. Rupee Cost Averaging

Rupee cost averaging means you invest a fixed amount at a specific interval irrespective of the NAV. When the market is low, you will receive more units, and when the market is high, you will receive fewer units. This ensures that your portfolio is always balanced, regardless of market conditions. Let’s look at an example for a better understanding,

Ayushi invested Rs 10,000 every month. The total amount invested for 4 months is Rs 40,000.

Date	Amount invested	NAV (Rs)	No. of units (Amount invested/ NAV)
Jan- 2022	10,000	32	312.5
Feb- 2022	10,000	35	285.7
Mar- 2022	10,000	29	344.8
April- 2022	10,000	28	357.14
Total	40,000	31 (average cost)	1300.14

If Ayushi had invested the entire amount as lumpsum in January, i.e., in the NAV of Rs 32, the number of units would be 1250 (40,000/32). So, compared to SIPs, she is getting more units (1300) with a lower average cost. Whether the markets are high or low, SIPs help you balance your portfolio with the benefit of Rupee-cost averaging, which means averaging the cost of your mutual fund’s investment. The average price is reduced in the long term with consistent SIP investment.

6. Benefit of Compounding

A compounding strategy is a method of generating new returns by reinvesting existing returns. You earn interest on your profit, which means you earn higher returns in the long term.

There is a saying that says the earlier you start, the more wealth you generate. So, because of the potential of compounding, SIPs are an excellent instrument for long-term investing and accumulating a larger corpus.

Let’s look at an example-

Suppose Ayushi (age 25 years) invested Rs 5,000 every month at the expected rate of 12% till the age of 50; at the end of the tenure, she will have a sum of Rs 34.8 lakhs.

Her friend Tanisha (age- 35 years) invested the same amount of Rs 5,000 every month at the rate of 12% till age 50; she will accumulate Rs 14.6 lakhs.

So, now you know why the power of compounding is called the 8th wonder of the world, and you can make the best use of it by investing early.

7. Automate your savings

Starting a SIP will help you ensure that you are saving money each month. You need to decide the amount that you want to invest in the choice of your fund. The main benefit of SIP is that you don’t need to remember the date of investing every month. Your SIP amount automatically gets deducted from your registered bank account, which promotes financial discipline. You can even schedule your monthly SIP to begin immediately after your salary is received, allowing you to save before you start spending.

8. Change the SIP Amount as per your choice

SIPs are very flexible; you can change them whenever you want. For example, you invested Rs 2000 in a SIP. Now, if you increase the amount to Rs 2500 next month, you can easily adjust it as you choose.

You also have the option to stop or skip your SIP, which means you don’t have to invest your money every month for a set period. If you do not have enough money to invest, you can skip the SIP for a few months or even stop it entirely.

Key Takeaways:

SIP is the most effective investment strategy if invested in the long term.
Start investing as early as possible and be consistent.
You can pause your SIPs for a month or two during a cash shortage.
Even if the stock market crashes, stay invested. SIPs aid you in balancing your portfolio.
SIPs offer you complete freedom and comfort to accomplish your goals.
With SIPs, investors need not be concerned about the vagaries of stock markets.
One can save tax by investing through SIPs and get the tax deduction under Section 80C of the Income Tax Act.

Conclusion

SIP is the most convenient way to invest in mutual funds, so start before it’s too late. Several mutual fund schemes are available in India; you may need clarification about where to invest. Therefore, you must invest according to your risk appetite, time horizon, and investment goals. The pandemic and rising inflation have taught us the importance of disciplined financial planning, and starting a SIP could be the first step toward this.

FAQs About Mutual Funds SIP:

Q1. What is a Systematic Investment Plan (SIP)?

Ans: A SIP is a method of investing in mutual funds in which investors regularly contribute a fixed amount at predefined monthly or quarterly intervals. These investments are designed to help individuals build wealth over time through the disciplined accumulation of assets.

Q2. How does a SIP work?

Ans: When you invest in a SIP, you select a mutual fund scheme and specify the amount you want to invest periodically (e.g., monthly). The chosen amount is automatically deducted from your bank account and invested in the scheme.

Q3. Can I start a Mutual Fund SIP with a small amount?

Ans: Yes, one of the advantages of SIPs is that they allow investors to start with a relatively small amount, making it accessible for those with limited funds. Some funds have minimum investment requirements as low as Rs. 500.

Q3. What are the advantages of investing through Mutual Fund SIPs?

Ans: SIPs offer several advantages, including:

Affordability: You can start with a small investment amount.

Discipline: SIPs encourage regular investing, helping you stay disciplined.

Rupee Cost Averaging: SIPs buy more units when prices are low and fewer units when prices are high, potentially reducing the impact of market volatility.

Power of Compounding: Over time, compounding returns can significantly grow your investments.

Q4. How do I choose the right Mutual Fund for SIP investment?

Ans: Consider your investment goals, risk tolerance, and investment horizon. Research and select mutual funds that align with your financial objectives and match your risk profile.

5. Can I modify or stop my SIP investments?

Ans: Yes, you can modify or stop your SIP investments anytime. Most mutual fund companies offer flexibility in increasing or decreasing the investment amount, changing the frequency, or discontinuing the SIP altogether.

Q6. What happens if I miss an SIP installment?

Ans: If you miss a SIP installment, there is usually no penalty, and the SIP continues as long as there is a sufficient balance in your bank account. Some fund houses may offer a grace period to make up for missed payments.

Q7. How are returns calculated in a Mutual Fund SIP?

Ans: Returns in a SIP are based on the cumulative performance of the fund units purchased over time. The investment strategy helps mitigate the impact of market volatility on the overall portfolio. You can also visit our Brokerage Calculator page.

Q8. Is there a lock-in period for Mutual Fund SIPs?

Ans: Unlike other investment options, SIPs in mutual funds do not have a lock-in period. Investors can redeem their units at any time, providing liquidity and flexibility. However, the investment horizon should align with the financial goals.

Q9. Are Mutual Funds SIPs suitable for all types of investors?

Ans: SIPs are generally suitable for many investors, including beginners and experienced investors. They offer a systematic and hassle-free way to invest in the financial markets.

by Instockbroker Team | May 27, 2024