Mutual funds are one of the most sought after investment avenues for those seek long term capital appreciation. Investors who wish to invest in equities by lack the knowledge and skill to invest directly in the stock market prefer mutual funds for several reasons. First of all, mutual funds offer active risk management. This means that every mutual fund scheme is managed by a fund manager whose job is make sure that the scheme is able to beat its underlying index and help (mutual fund) unitholders earn capital appreciation in the process. Also, mutual funds invest across the spectrum in Indian and foreign economies as well as in marketable securities. One single mutual fund unit is a combination of multiple stocks and other securities. To find an investment scheme that offers such diversification is a rarity.
Since mutual funds invest in various economies and money market instruments, the performance of a mutual fund generally depends on the performance of its underlying assets and the various sectors and industries in which it invests.
Market regulator SEBI has further categorized mutual funds based on these schemes’ various unique attributes like fund size, asset allocation strategy, risk profile, investment objective etc. Equity, debt, hybrid, ETF and gold are just few of the several mutual fund categories available for investment and hence, investors depending on their appetite for risk should keep a diversified investment portfolio.
No matter which mutual fund scheme you choose to invest in, there are always two investment choices available for investors. They can either make a one time lumpsum investment and pay the entire investment amount right at the beginning of the investment cycle, or they can opt for a Systematic Investment Plan.
What is Systematic Investment Plan?
Systematic Investment Plan, abbreviated as SIP, is a method for investing in mutual funds. SIP is probably the easiest way to invest in mutual funds especially if you wish to inculcate the discipline or regular investing. An individual must be KYC compliant if he or she has to start a SIP in a mutual fund scheme. Investors need to first decide on an investment amount they are comfortable investing at regular intervals. After completing a one time mandate with the bank, every month on a fixed date a predetermined amount is debited from your savings account and electronically transferred to the fund.
Those who are new to investing and not quite sure about how much money they need to invest in mutual funds via SIP can refer to a free online tool like SIP calculator.
Can SIPs help investors take advantage of volatile markets?
SIP is a way to invest a fixed amount at regular intervals (mostly every month). SIP investors with a long term investment horizon might benefit from a technique referred to as rupee cost averaging. Since the investment price remains constant in SIP, whenever the markets are low and so is the NAV of the mutual fund scheme, more units are allotted to an investor’s portfolio. Similarly, when the markets are performing and the NAV of the scheme is high, less units are allotted. Rupee cost averaging takes advantage of the fluctuating markets and allots units to an investor’s mutual fund portfolio in a smarter way. This mechanism also makes sure to adjust the investment risk depending on market fluctuations. This is the best strategy to buy more fund units when the markets are low and less when the markets are less.
SIP might be the ideal way to invest in mutual funds especially if you wish to remain invested for a longer time period. But it is always a good idea to do some background search about the scheme and its past performance before investing.