Systematic Investment Plan: A Guide To Systematic Investing In Mutual Funds

When making a purchase, we adore the idea of having multiple choices. One good thing is that these days when it comes to investment, we have a wide range of options as well. Gone are the days when people only relied on conventional investment avenues to save and invest their hard earned money. Since the interest rates have witnessed a substantial dip, people are reconsidering investing in fixed income instruments and are looking for other options that can be rewarding in the long run. People no longer desire to lock their investments for longer durations and want to invest in such a way that their portfolio has enough liquidity all the time. 

Today’s younger generation is well aware of the importance of savings. Young investors that do not have any existing liabilities or financial commitments can take higher risks and give themselves an opportunity or generate a better alpha in the long run.  If you start early, you have more years in hand to achieve your ultimate financial goal and you can even take risks that other older investors cannot afford. Young investors do not want to invest their money in conservative schemes and are willing to take some chances for earning better capital appreciation. 

One way to diversify your investment portfolio is through mutual fund investments. Yes, it is true that mutual funds do not guarantee returns, but they can be a good investment choice if the investor chooses a scheme based on their risk appetite, investment objective, and investment time horizon. Mutual funds might be able to offer inflation-adjusted returns in the long run. These are market-linked schemes that invest in a diversified portfolio of securities to achieve a common investment objective. Mutual funds pool funds from investors sharing a common investment objective and use this pool of funds to buy stocks, bonds, and other money market instruments. A mutual fund may invest in different assets like equity, debt, gold, currencies, foreign markets, etc. 

Mutual funds have dedicated portfolio managers. These managers constantly observe the market vagaries and make investment decisions based on the market sentiment. Investors do not have to worry about making an investment portfolio, as it is the duty of the fund manager to build a portfolio of stocks and securities that show potential and can offer value and growth in the long run. All one has to do is invest in this basket of securities that are actively managed by a team of fund managers.  Thus, mutual funds are known to offer active risk management. They invest in a diversified portfolio of securities and might help investors achieve capital appreciation. Most mutual funds also offer high liquidity. An individual can buy or sell the mutual fund units during a business day. They can make a purchase or sell their existing mutual fund units depending on the current NAV of the mutual fund that is determined at the end of the day.

To mitigate the overall investment risk in market linked schemes like equity mutual funds, investors can take the SIP route. For those who aren’t aware, there are two different ways in which one can invest in mutual funds – either by making a lump-sum investment or by opting for the Systematic Investment Plan.

When one makes a lump-sum investment, they have the chance to buy more units at the scheme’s current NAV (Net Asset Value). 

A Systematic Investment Plan (SIP) on the other hand is an approach that allows the investor to invest small, fixed sums periodically.  SIPs come in different forms such as weekly, monthly, quarterly, biannually, and annually. However, salaried professionals prefer the monthly SIP option as this allows them to save and invest a fixed sum from their monthly income.  

Here’s a simple example to help readers understand how SIP in mutual funds work –

Let us assume that you want to invest Rs. 3,60,000 in a large cap mutual fund scheme over a period of 3 years. You are worried about the equity market’s volatile nature and hence, you do not want to invest the entire sum all at once. If you opt for a SIP plan and decide to invest a fixed sum of Rs. 10,000 per month, in the next 36 months, you would have a corpus of Rs 3.6 Lacs. Also, depending on the performance of the scheme the invested sum might accrue some interest in those three years. 

What is the difference between SIP and Lump-sum?

Lump-sum investment: Earlier, when there wasn’t the option of SIP, investors had to make a lump-sum investment in mutual funds. A lump-sum investment is a one-time investment where the individual invests the entire investment sum right at the beginning of the investment cycle. A lump-sum is the choice of businessmen and investors who have seasonal revenues. 

SIP: As mentioned earlier, a Systematic Investment Plan is a convenient way to invest in mutual funds. All an investor has to do is complete a one time mandate with their bank following which every month on a fixed date, a predetermined amount is debited from your savings account and electronically transferred to the mutual fund. 

What is better – SIP or Lump-sum investment?

A lump-sum investment may allow the investor to buy more units at the fund’s existing NAV but this will also expose their entire investment sum to the volatile markets. On the other hand, through the SIP method, one can invest small, fixed sums at regular intervals. If you continue investing in mutual funds via SIP over the long term, you can benefit from the power of compounding. If the NAV of the fund is high, lesser units will be allotted. Similarly, when the NAV is low more units are allotted. This is known as rupee cost averaging and can only be benefited from SIP investing.

SIP investors can also refer to the online SIP calculator to determine how much money they must invest at regular intervals in order to achieve their life’s long term goals.

Young earners seeking investment in mutual funds via SIP must be KYC compliant. To start a mutual fund SIP, investors have to complete a one time mandate with their bank. Once they are done deciding the monthly SIP investment amount, every month on a fixed date the decided amount will be auto debited from their savings account and electronically transferred to your mutual fund portfolio. Investors will be allotted units in quantum with the SIP investment amount and depending on the fund’s current NAV (net asset value).

SIP investments have their perks. For example, if you invest in equity funds and have an investment horizon of five years, and start a SIP in mutual funds, you can benefit from the power of compounding. When you earn interest on the interest earned from the principal investment amount, it is referred to as compounding. Through systematic investing, it is now possible for investors to target their life’s long term financial goals. Young investors have the advantage of starting early and benefiting by having more years in hand to invest and allowing themselves to create wealth.

Is SIP the most effective way to earn capital appreciation?

Investing in mutual funds via SIP might be the most effective way to earn capital appreciation over the long run. Here are some of the reasons that make SIP an ideal investment option for long term investors:

SIPs are flexible in nature

SIPs are flexible. This means that investors can increase or decrease their monthly SIP amount depending on their income inflow. Supposed you are going to face a cash crunch for the next six months and might not be able to continue investing with the existing SIP amount, you can inform the fund house / AMC and change the monthly SIP amount to a more pocket friendly investment amount. Also, you can stop your SIPs midway and withdraw the capital appreciation that you have earned throughout your tenure. Some fund houses even offer the option of skipping a month’s SIP and investors can continue investing the following month in a hassle free manner. Flexibility in investments is essential for someone who is anticipating wealth creation over the long term and SIP gives that required flexibility to mutual fund investors.

Might benefit from compounding

Mutual funds are often considered to be long term investments. Especially if you are investing in equity mutual funds, you are expected to remain invested for at least five to seven years. Also, if you continue investing in mutual funds via SIP, you might even benefit from compounding. But compounding will only show its true potential if you keep investing even in volatile market conditions. So, it is better that you do not stop your investments and continue investing in mutual funds via SIP if you want to gain from compounding 

SIP inculcates the discipline of regular investing

When you start a mutual fund SIP, every month on a fixed date, a predetermined amount gets deducted from your bank account and gets transferred to your mutual fund. Thus, if you continue investing in mutual funds via SIP, you are not only investing regularly but inculcating the habit of disciplined investing. Approaching your investments in a disciplined manner is the key to successful investing, and if you stop your SIP investments, this may impact your savings.

SIP might help investors fulfill long term goals

SIP is a powerful investment tool that helps investors target their life’s long term financial goals. That’s because SIP investments carry the potential to beat market inflation and benefit from compounding only if the investors continue investing until their investment objective is met. But if you leave your investments midway and redeem your mutual fund units, you may lose out on several benefits which SIP investments offer. So, if you want to increase your chances of fulfilling your ultimate financial goal, you need to stay committed to your investment and refrain from prematurely withdrawing your mutual fund investments.

SIP might be an effective way to earn capital appreciation, but investors should understand that mutual funds do not offer guaranteed returns. Hence, it is better to consult a financial advisor before investing.

Mutual fund investments are subject to market risks, read all scheme related documents carefully