Equity Fund Investors Must Choose The SIP Route: Here's Why

As of 31st March, 2022
Mutual fund investments have garnered a lot of popularity off lately. These are market linked schemes that invest in a diversified portfolio of securities to generate capital appreciation over the long run. According to AMFI (Association Mutual Funds India), Assets Under Management of mutual funds have grown from Rs6.75 trillion as of February 29, 2012, to Rs37.56 trillion as of February 28, 2022. That’s a whopping 5 times plus growth in just one decade. 

In 2021, till November, equity mutual funds contributed to these figures as well with Rs 71,600 crore flowing into equity schemes. 

Equity mutual funds are one of the most sought-after investment avenues among other mutual fund investments. The reason equity mutual funds are so popular is because they offer the features of the equity markets and risk management in one single investment. Equity mutual funds invest the majority of their investible corpus in equity and equity related instruments of publicly listed companies. This makes them a stock market linked investment scheme. However, since equity schemes are managed by a team of professional fund managers, investors who seek active risk management consider them over direct stock market investment. 

Although investment risk in equity mutual funds is very high, it can be mitigated through the option of SIP. SIP is mistaken for mutual funds very often and it is necessary for investors to clear their doubts before investing their hard-earned money in any investment scheme. 

The best part about investing in equity funds via SIP is that one can invest smaller fixed amounts at regular intervals rather than investing a large amount at once. Investing in small amounts seems like a convenient option for several investors over a lump-sum investment and this is what has made SIP a popular mode of investment. Also referred to as the Systematic Investment Plan, SIP aims to offer convenience and hassle-free investing to all equity mutual fund investors. 

As perceived by many, SIP is not an investment instrument in itself but a mere tool to invest in equity mutual funds. This mode of investing adapts a systematic investment approach that may inculcate disciplined investing in young and novice investors. 

Through the option of the Systematic Investment Plan, retail investors can break down their overall investible corpus in small monthly installments. The SIPs come in weekly, monthly, quarterly, biannually, and annual formats. However, most salaried professionals consider the monthly SIP option as it allows them to save and invest a fixed sum from their regular income.

 
Here’s a simple example explaining how the whole idea of SIP works –

Assume that you want to invest Rs 1.2 Lac in an equity mutual fund scheme. However, you do not have enough savings to invest this amount all at once. Here, what you can do is that you can start a monthly SIP of Rs 10000. As soon as you make your first month’s investment you will be allotted units and every month as you continue your SIP investments , you will receive units depending on the scheme’s existing NAV (net asset value). At the end of the 12 months, you would have accumulated the sum of Rs 1.2 Lac in the equity scheme. Also, depending on the scheme’s performance over the course of the past 12 months, you may even accrue some interest over the invested sum.

The primary advantage of considering SIP investments over lump-sum is that the investor is able to invest small, fixed sums at periodic intervals in equity funds. This makes investing affordable and makes it possible for investors from all walks of life to invest and give themselves a chance to create long term wealth. 

Another reason why investors prefer SIP is that it offers flexibility. As an investor, you can choose the  sum you want to invest,  decide the interval (weekly, monthly, quarterly, etc.), as well as the date of every month on which you want to make this investment. Investors should refer to the equity mutual fund’s SID (Scheme Information Document) to determine the minimum investment amount. 

It is possible to automate your SIP transactions so that you do not have to make manual investments. Once you instruct your bank to allow auto-debit, every month on the predetermined date, the fixed SIP sum will be deducted from your savings account and transferred to the mutual fund account. As mentioned earlier, you will be allotted units in quantum with the SIP sum and depending on the current NAV of the scheme. This is a convenient and seamless investing method and saves the investor from the hassles of manual investing.  

Making your SIP transactions automatic saves the investor from the hassles of in-person investing and automatically instills investment discipline, something that is a must for long term wealth creation. 

Every year as the individual receives increment, he or she may even choose to top-up their monthly SIP installment. This will not only increase their savings but may also help investors achieve their financial goals faster. 

Flexibility does not end with modifying your SIP sum or automating the transactions. Investors can even decide to pause their SIP investments for time being or even decide to completely stop investing if they feel that the scheme is not performing as per their expectations. There are no cancellation charges applicable with SIP investments. Also, the investor can start a fresh SIP in another equity scheme at any given time. 

Another benefit of starting a SIP in equity funds is that investors can take advantage of the rupee cost averaging method. Here is how it works –

Whenever you make an investment in an equity fund via SIP, you purchase a certain amount of units. If the NAV of the equity fund is high during your month’s SIP installment, you will purchase fewer units. Similarly, when the NAV is low, you can purchase more units. For example, assume that you invest Rs 5000 on the 5th of every month in a large cap fund. When the SIP is credited, the NAV stands at 20 which allows you to buy 250 units. In the following month, the NAV stands at 10 during the SIP installment day. This allows you to buy 500 units. In the month after that, the NAV goes up to 25 and now you purchase 200 units. Similarly, depending on various factors the NAV of the equity scheme may rise or fall down. Since your SIP sum remains stagnant, you are able to buy more units when the NAV is low and fewer units when the NAV is on the higher side. This is referred to as rupee cost averaging as you average out cost per unit in the long run. 

Investing in equity funds through the Systematic Investment Plan can be a good choice as one does not have to expose their entire investment sum to market vagaries right from the beginning of the investment cycle. Investors only expose a portion of their sizeable corpus every month, thus mitigating the overall investment risk. 

Investors can even use the online SIP calculator to compute the total assumed returns that their investments might fetch over a fixed duration. The SIP calculator is an easy-to-use tool that computes complex calculations in a jiffy and hence is termed a time-saving tool. 

It works in two different ways –
•    You can compute the future assumed returns from your existing SIP investments
•    It can tell you how much you need to invest regularly in order to achieve your financial goal

Investing in equity funds has its own risks. Since these funds predominantly invest in stocks, the investment risk is very high. Investors are requested to consult their financial manager before investing.