Many investors stay away from opportunities such as mutual funds due to a lack of a corpus to invest in. This thought comes from the myth that mutual funds investments demand a large corpus. Of course, that is one way to invest in mutual funds, and it focuses on appreciating or protecting the capital that you already have.
But what if you want to create a new corpus using a mutual fund? Instead of putting a lump sum of money in the fund, what if you could create a corpus for the long-term by investing in instalments every month? Systematic investment plans are tools made just for that. Let us learn more about SIPs and see how it is beneficial.
What are systematic investment plans?
As discussed above, there are two ways to go about investing in a mutual fund. Either you can put in a corpus amount that you have already made to appreciate or protect the same. In the second method, you can invest a small amount monthly in a fund of your choice to build a corpus with time. The second method is called a SIP.
Hence, SIP is just a tool of investment and not an investment vehicle. You can select a fund of your choice and choose to invest in the same through instalments.
Features of SIP investments
Below are some features of SIP that could help you with your choice.
- SIPs allow you to start small. You can start your investment with an amount as small as Rs.500 here. Even with such a small amount of money, you can kick-start a corpus-building journey. To be most successful, ensure you ramp up your SIP contributions whenever your income increases if your budget allows. This way, your SIPs will become fruitful faster.
- SIPs help you with rupee cost averaging your investment. It is a concept in which, if you buy units of a mutual fund when the NAV of the fund is higher, similar amounts of units are bought when the NAV is lower as well to average the costs. With SIPs, you don’t need to worry about the same as it provides the feature by default as you are buying NAVs every month.
- The above factor also means that you don’t need to worry about timing your investments with SIP. When you are investing a lump sum amount of money, since the money at stake is larger, you need to invest in such a time where there is growth potential. If not, you may end up losing money.
But with SIP, since you are putting money in instalments and since the amount of investment is small, you need not worry about timing the market.
- SIPs enable the power of compounding to your investment. In investment terms, compounding is when the profit from your investment is reinvested into the corpus so that the compounded corpus will start earning profit.
For instance, if your corpus is Rs.100 and your earnings at the end of the day are Rs.10, the compounded corpus of Rs.110 will start earning profits thereafter. In the long run, this will help your investment grow tremendously.
- Investing in SIPs is very flexible. You can choose an amount of your liking, hike or cut the monthly SIP amount, or skip a SIP instalment (although not suggested) all very easily. Even if you want to migrate to another fund, you can easily redeem your mutual fund units as you do with your regular mutual fund.
Systematic investment plans are an easy way to invest in mutual funds. But it demands research and study for it to be successful. Hence, make sure you do your homework before you invest.
