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Considering the volatile nature of the stock market, investing a lump sum amount in a mutual fund may not always be the right way to go. This is because lump sum investments cannot protect you from the highs and lows of the market. In addition to this, there’s also the risk of investing in the market at the wrong time.
Fortunately, there’s a way to reduce these risks. How, you ask? By opting to invest in a mutual fund through a SIP. Wondering what it is and how it can help you invest in mutual funds in a much better manner? Here’s a quick overview of what it is and how it works.
What is a SIP?
A Systematic Investment Plan, also known as a SIP, is a unique mode of investment that allows you to invest in mutual funds. A SIP requires you to invest a fixed amount of money consistently in a mutual fund of your choice for a specified tenure. As you continue to invest in a mutual fund consistently over the various highs and lows of the market, a SIP helps reduce your investment risk.
Benefits of a SIP
A Systematic Investment Plan offers a host of different benefits. Here’s a quick overview of a few of them.
1. Flexibility
One of the major advantages of a SIP is that it is very customizable. You get the freedom to choose the amount of investment, the tenure, and the mutual fund. Such a high level of flexibility makes Systematic Investment Plans the perfect investment mode for all kinds of investors irrespective of their risk profile.
2. Low Investment
Systematic Investment Plans have no entry barriers whatsoever. You can start a SIP in a mutual fund by investing as low as just ₹500 per month. Thanks to such low minimum investment limits, you can easily partake in the wealth-creation process without burning a hole in your wallet. That’s not all. Most SIPs also give you the option to increase the amount of investment over time as well.
3. Automation
Unlike a lump sum investment, you won’t have to invest manually if you opt for a SIP. Once you’ve set it up, the chosen amount of investment is automatically deducted from the linked bank account and is used to purchase units of the mutual fund of your choice.
4. Rupee Cost Averaging
When the market is at a high, the SIP purchases fewer mutual fund units and when the market is at a low, the number of units purchased would be higher. As a SIP continues to invest in the mutual fund for a long period, the cost of your investment is reduced significantly through a phenomenon known as rupee cost averaging. Thanks to the lower per-unit cost, the returns that you get are likely to be higher than what you would have experienced had you made a lump-sum investment.
5. Convenience
Another very important benefit of investing in a mutual fund through a SIP is that it eliminates the need to time the market. A Systematic Investment Plan is designed to work through the different market phases. Therefore, once a Systematic Investment Plan is set up, you won’t have to spend time researching or analysing market movements. This makes a SIP the perfect option for beginner investors who lack an in-depth understanding of the stock market and those who don't have the time to conduct extensive research.
6. Financial Discipline
Many individuals lack financial discipline, which happens to be a major reason for them not reaching their financial goals. When you start a SIP, you essentially commit to investing a fixed sum of money for a specific period. This tends to automatically bring about the financial discipline required for the wealth creation process.
Conclusion
As you can see, when it comes to investing in a mutual fund, a Systematic Investment Plan is the right way to go. It can not only help reduce the risks involved with your stock market investment but can also increase the return that you get to enjoy due to the phenomenon of rupee cost averaging. That said, before you start a SIP in a mutual fund, make sure to thoroughly research the fund that you wish to invest in. Choosing the right fund is key to ensuring that you reach your financial goals on time.
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