Investing in mutual funds is not difficult anymore! Two modes of investment have made it convenient for young professionals. One mode is called the lump sum mode. In this mode, you are paying the required amount for mutual fund investment at once. For this mode, please make sure that you have the required investment at your hand. The other is the SIP (systematic investment plan) investment mode.
What are systematic investment plans?
A SIP investment enables you to invest a small sum regularly. A specific amount is deducted from your bank account monthly through the SIP mode. Use the standing instruction option or auto-pay facility to invest in SIP. Unlike a lump sum fund allocation, you invest over time through a SIP. In the SIP mode, you must set aside a specific sum regularly, helping you instil financial discipline over time.
How do SIPs work?
By investing in a mutual fund through SIP mode, you purchase a specific sum of fund units correlating to the investment amount. There is no requirement for timing the markets for investing through the SIP mode. That’s because you can enjoy the benefits of both bear and bull market trends. When the market is in a bear phase, the fund manager purchases more and more units. Conversely, the manager buys fewer units when the market is on a bull run.
As mutual fund NAV is updated daily, the cost of buying units may vary between SIP instalments. Over time, the cost of purchase averages out and decreases. This feature is called rupee cost averaging, a benefit unavailable in the lump sum mode.
Why invest through SIPs?
Here are a few reasons you should consider investing in mutual funds through systematic investment plans:
- They are convenient
- SIPs offer the benefit of rupee-cost averaging
- These plans offer professional management
- There are no caps on the maximum SIP amount
- They encourage financial discipline
There are a few tips before investing in your mutual fund through SIPs. The tips are:
- Determine investment goals
Determine whether you are investing for a short period or wish to stay invested for the long term. Apart from the investment horizon, you must know your financial goals. Without the target corpus, you can’t decide your investment horizon.
- Start early
Set aside a portion of your income and start investing at a young age. You can leverage the benefit of compound interest by starting early. The earlier you start, the greater the long-term return you can expect as returns. An early investment journey helps you save more. Therefore, start investing as soon as possible and enjoy the most of your SIP investment.
- Choose wisely
Different asset management companies, or AMCs, offer different variants of mutual fund schemes. Before starting, check AMC’s track record and investment strategy. Compare the mutual fund schemes offered by different AMCs online by looking at their past performance, expense ratio, and management effectiveness.
- Stay invested
Mutual fund investments come with risks. For instance, equity investments are volatile because of the varying market movement. Fight the urge to redeem or cancel your mutual fund SIP during a bear market. Instead, invest consistently to take advantage of rupee cost averaging.
- Diversify investments
Diversify your investment portfolio among different mutual fund variants. Diversification will decrease the risk associated with mutual fund investment. Diversify your mutual fund portfolio in such a way that the risk falls within your risk tolerance.
- Step-up facility
Don’t limit yourself to investing a fixed sum. With every salary hike, it is prudent to increase your SIP amount. This facility is called the step-up facility.
There are numerous other tips that you must follow if you are investing in mutual funds through SIP. Contact a financial advisor if you have doubts.
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