Why Should You Consider Starting a Mutual Fund SIP Early?

Every individual has different financial goals. Some want to invest so that they can save taxes. Some people are looking for a lucrative investment scheme to build a retirement corpus. Some have to meet short term goals like buying a car or renovating your home. Because the goals of people vary, everyone needs to first chart out a proper financial plan. Financial planning is making a list of your short term and long term goals. Having a defined set of goals might help an individual in making an informed investment decision. 

One you have prioritized your goals, the next thing to do is identify your risk appetite. Now remember that every investment scheme carries a different risk profile and hence, it is necessary for individuals to understand their risk appetite. There are some individuals with zero risk appetite. Such investors do not wish to take any risk with their finances and are usually okay settling with investment schemes offering low fixed interest rates. However, there are some people who do not mind taking the extra risk with the hope of fetching some capital appreciation in the long run. Such people may consider investing in mutual funds.

Over the past few years, mutual funds have become quite popular among Indian investors. A lot of individuals are considering investing in mutual funds because of the kind of the capital gains they have on offer. Mutual funds are a pool of professionally managed funds, where the fund managers buys / sells securities in accordance with the scheme’s investment objective. 

SEBI, the regulator of mutual funds in India defines them as, “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 money collected from investors is spread across various instruments like equity, debt, corporate bonds, government securities, treasury bills, etc. Investors receive units in quantum with the money invested and depending on the fund’s existing NAV. The performance of a mutual fund depends on the performance of its underlying assets. 

There are two ways to start investing in mutual funds - you can either make a lumpsum investment or start a mutual fund SIP. If you have surplus cash parked with you and feel you may be able to take it to better use, you may make a lumpsum investment in mutual funds. However if you want to give your mutual fund investments a systematic approach you may start a mutual fund SIP.

What is SIP?

Systematic investment plan or SIP is one of the ways of investing in mutual funds. With SIP all an investor needs to do is instruct their bank and every month of a fixed date, a predetermined amount is debited from the investor’s savings account and electronically transferred to the mutual fund. SIP may inculcate the discipline of saving regularly in an investor. 

Why should one start investing in mutual funds via SIP early?

Time and tide wait for none. Once the time has passed, it won’t return and hence if you want time to be your best friend you may have to start investing early in mutual funds. If you start a mutual fund SIP at an early stage in your life, there are several ways you may benefit. Firstly, you are able to inculcate the discipline of investing regularly. A lot of people wait for the ‘right’ moment, but remember that it is almost impossible to time the market. So the earlier you start investing the better it is. Investors who start early may even benefit from compounding. Compounding in mutual funds means interest earned on your principal amount that gets reinvested in the original amount and acts as the principal amount for your next investment cycle. Compounding holds the potential to turn small SIP investment amounts into a decent corpus. Another good thing about investing in mutual funds through SIP is that they can benefit from rupee cost averaging. When the NAV of the fund invested is low, mutual fund investors are allotted more units. Similarly when the NAV is high, lesser units get added to the unit holder’s account. Another good thing about starting a mutual fund SIP is that one does not need to have a large capital in hand for the initial investment. One can decide on a certain amount and invest this amount at regular intervals without having to sacrifice too much. 

Long term financial goals like retirement planning need one to have a long term investment horizon. And if you start a mutual fund SIP at an early stage in your life, you might be able to get closer to your ultimate financial goal. To know more download our mutual fund app now!

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