Become A Smart Saver by Starting a SIP In Mutual Funds

A lot of people wish to have a big house, a posh car, and a commendable retirement corpus. These are goals that may require a wealth creation plan. Unfortunately, not everyone is good at financial planning as they feel it can be complex or may require hiring a financial advisor for a hefty fee. Financial planning may sound complex, but it is quite simple and starts with prioritizing life’s short, medium, and long term financial goals. Once they have a defined set of goals, investors can match investments to these specific goals and may choose to invest regularly till their investment objectives are attained. 

Mutual funds can be optimized by investors to target their life’s financial goals. A mutual fund is a financial vehicle that pools financial resources from investors sharing a common investment objective and invests the capital raised across asset classes and money market instruments to generate capital appreciation. And the easiest way to invest in mutual funds is by opting for a Systematic Investment Plan.

What is a Systematic Investment Plan?

A Systematic Investment Plan, also referred to as SIP, is a method of investing in mutual funds. There are two ways of investing in a mutual fund scheme – SIP and lumpsum. As the name suggests, a lumpsum investment is where the investors invest the entire investment sum right at the beginning of the investment cycle. Although investors receive more units in quantum with the sum invested and as per the current NAV (Net Asset Value), they end up exposing the entire investment sum right from the beginning of the investment cycle.

A Systematic Investment Plan, on the other hand, is an investment process where retail investors save and invest a fixed sum at regular intervals. The sum which the investors invest in mutual funds via SIP is usually low. The minimum SIP investment sum may vary and is mentioned in the mutual fund Scheme Information Document (SID).

Here’s how SIP works 

Once investors decide how much they want to invest in a particular mutual fund scheme and also decide on which date of every month they want to invest, every month this predetermined SIP sum is debited from the investors’ savings account and electronically transferred to their mutual fund account. Since the SIP sum remains stagnant, investors receive units depending on the scheme’s current NAV. Every time investors invest via SIP, they buy a certain number of units. The value of these units may increase or decrease depending on the performance of the scheme.

Save smartly with SIP

SIP may not only help you in your wealth creation journey but may also make you a smart saver. Here’s how you can benefit from SIP investing –

Save in a disciplined manner 

Once you allow auto-debit, every month the SIP sum is debited from your savings account and credited to the mutual fund account. This way investors do not have to get involved in manual transactions. SIP ensures that you save and invest a fixed sum every month and may inculcate the discipline of regular investing.

SIPs are flexible 

Once you start investing in mutual funds via SIP you need not continue with the same investment sum. Depending on your changing financial goals you can even increase the monthly SIP sum. There is no upper limit in SIP, which means, investors can invest as much as their risk appetite allows them. Investors can even stop their investments in a particular mutual fund scheme that has been underperforming and start investing in another scheme. There is no penalty for stopping your SIP midway.

Power of compounding

Power of compounding may be able to multiply your small monthly SIP sums and turn them into a wealthy corpus over the long haul. Compounding is the interest that is earned from the profits which are earned through the principal investment sum. The power of compounding may allow investors to get closer to their financial goals, but for that, they may have to invest regularly without stopping or skipping their monthly SIPs.

Rupee cost averaging

Over time, investors’ average purchase cost reduces when they invest in mutual funds via SIP for the long term . This happens because of rupee cost averaging. When the NAV of a scheme is low, more units are allotted. Similarly, when the NAV is high, investors receive lesser units. This happens because the SIP sum remains stagnant, but the NAV keeps fluctuating. Over the years, investors may receive more units and this will mitigate the overall investment risk.

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