Recommendations for investing in mutual funds are everywhere, even on roadside hoardings. Over your payment app, with your stock broker, with your bank, etc, are some of the many easy ways to start a SIP (Systematic Investment Plan) today.
However, if you are reading this article, it is likely that you still have your doubts on what's so great about this form of investment.
SIP is a plan where investors make regular payments into a mutual fund and can be started for as little as Rs 500 per month. It could be the easiest and safer way to start investing in the stock markets since these are managed by market experts of reputed asset management companies.
If you are considering this form of savings, it is best to start as soon as you can. Here's why:
1. Helps develop financial discipline
If you are in your 20s, SIPs is a great way to develop the habit of setting aside a portion of your monthly earnings towards your future. Savings is the first towards attaining early financial independence for bigger expenses that will arise in the later years like a down payment for an apartment or purchasing a vehicle.
When you receive a hike in your salary, you can raise your monthly SIP amount. You can also choose to start another SIP in a different category of mutual funds or even stop the SIP (without having to withdraw the funds) or skip an installment or automate your payments.
Once your KYC procedure has been completed with your service provider, adding new schemes to your portfolio is easy. Start new SIPs to diversify or move to a different scheme, the process has been simplified to work out within the convenience of your house.
Make sure to read the scheme documents for any lock-in requirements and exit load before you decide to make changes to an existing SIP.
You do not have to worry about entry timings and missed opportunities with SIPs like you would in the case of individual stock investments or even FDs and RDs (missed higher interest rate opportunities).
The 'cost of acquisition' is as crucial as the selling rate to make maximum profit out of any investment.
Since there is a fixed amount invested every month, it allows for "averaging" i.e when the markets are trading high, lesser units of the fund will be added to your portfolio, but when markets fall, more units will be added, creating a balance.
In this way, you do not have to worry about volatility in the markets and can stay committed to your long term SIP.
4. The power of compounding
Like any investment, especially those linked to the markets, time works in your favour. SIPs have monthly returns and if you choose to, these returns can be reinvested in your existing scheme.
Over time, when this cycle continues, the compounding effect ensures you make exponential gains.
The earlier your start your SIP and the longer you stick to it, the greater the return on investment.
5. Compare performance
The returns earned by every mutual fund is public information. You can visit the asset management company's website or numerous finance-based websites that allow you to compare the performance of two funds.
Based on your financial goal and expense ratio in each fund, you can choose a SIP in a mutual fund with the kind track record that you wish to see for your own investment.
These websites also provide SIP calculators for you to arrive at a figure that you should set aside in monthly contributions based on your financial goal.
The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.
About the author
Olga Robert is an M.Com graduate covering equity markets and personal finance for nearly three years. Her interests include tax planning, equities, DIY personal finance management and government schemes.