Investing in mutual funds have become the talk of the town ever since demonetization happened. Individuals have started shifting their investments in the traditional asset to a financial asset, and equities (both in a standalone format or through mutual funds) have remained at the forefront when it comes to a financial asset.
Investing in mutual funds can be done primarily through two ways – lumpsum and Systematic Investment Plan (SIP).
In lump sum mode, an individual invests the full amount at one go, whereas in SIP mode, the investor invests a small amount at regular interval. Compared to lumpsum investment SIP gives investors control over the duration for investing in mutual funds like a weekly or a monthly investment period as well as on the amount to invest. With calculators available online like Reliance, L&T or HDFC mutual fund calculator, investors can now get an estimate of their mutual fund investment via SIP.
In this blog, we seek to discuss the top reasons why you should use SIP to invest in mutual funds –
SIP Provides Discipline to Investing
One of the key benefits of investing via SIPs is that they cultivate investing habit in an investor. Given the fact that SIP works similar to how Recurring Deposit in a bank works or how Equated Monthly Installment (EMI) for a loan works, an individual gets into a habit of saving on a fixed date every month.
SIPs Finance Dreams
Everyone has some goals – be it financial or personal. While many wants to buy an iPhone X, some want to save for an executive MBA or a pilgrimage for his/her parents. Dreams are numerous, and SIP is a great way to plan for these dreams and make them come true. Be it a dream that would cost a few million or be it a dream can be achieved in few thousands, an SIP is meant for all.
SIPs Provide with the Power of Compounding
It makes sense to invest via SIP if you are determined to remain invested for a long-term period.
Off late, the first thing a person does the moment he starts earning is to open an investment account for investing in a mutual fund – doesn’t matter if the amount is as small as Rs 500 per month. The idea behind the approach is to get the benefit of time. If you start early, you reap more profit than anyone else. This is because your investment compounds over long-term and accumulated gain also begin to bring in returns in addition to your principal capital.
You can use SIP calculators to see the result of compounding yourself. Visit any SIP calculator page, for example leading mutual fund bank like HDFC mutual fund calculator and change the duration of your investment. You will observe how the returns change with respect to the investment duration.
If you refer to the chart below, Rs 25000 invested monthly via SIP started to see more profit after the first five years (see chart below).
SIPs Shield you from Equity Volatility
With periodic investing through mutual funds, you get acquainted with a bumpy ride, smooth ride and also stable ride. While equity is known for ups and downs, you can swim through the same with great ease with the help of SIPs. Investing regularly at every interval ensures that your cost of acquisition of a fund is averaged out. This process helps you shield from volatility because you invest in all weather – be it good, bad, or ugly through your disciplined approach.
SIPs Provide Diversification
We all must have heard the saying – never put all your eggs in one basket. If you are looking to invest in equities and if you put in all your money in one stock or few stocks, you end up with huge concentration risk. In such a scenario, mutual funds, provide you with the benefit of diversification as it invests in multiple securities. Investing via SIP offers a great way of diversifying even when you are investing a small sum of Rs 500.
SIPs Offer Flexibility and Convenience
Starting and stopping a SIP is very easy, and there is no penalty for foreclosure.
Also, investing in a mutual fund via SIP route is pretty convenient. All you need to do is visit any AMC website and make the transaction using net banking. Alternatively, you can use any third-party site such as Orowealth and use your net banking, cheque, and other means of payment and make the transaction.