When you make a lump sum investment in a mutual fund, if it is an ELSS mutual fund, the money is locked for a particular time. The performance of a mutual fund depends on market volatility. An SIP is beneficial in comparison to a lump sum investment because of rupee cost averaging. For example, when the market is down, you are able to purchase more units of a mutual fund with the same SIP amount. When the market is up, you purchase less units of a mutual fund with the same SIP amount. This in turn ensures that you buy more shares of an investment when prices are low, and less shares when they are high. The rupee cost averaging effect lessens the results of short-term market fluctuation on your investments.
Starting with an SIP is advisable, if you are at the beginning of your investment journey. With an SIP, you can invest in a combination of mutual funds. An SIP will also inculcate a habit of regular savings.
Before investing, you need to do some research on the types of funds that you are interested in. Mutual funds range from equity, debt or hybrid. Equity funds are primarily made of equities, debt funds are made of government securities and bonds, while hybrid mutual funds are a combination of the two. The first step is to decide the level of savings that you would like to commit for mutual fund investment. Once you have decided, select the amount and the number of mutual funds. Instead of investing in too many funds, it is advisable to invest in just 3-4 quality mutual funds which are a combination of debt, equity and hybrid funds. This will create a robust and diversified portfolio. Ensure that you select the funds which have been consistently performing well over the past few years. The second step is the investment horizon. If you want to make the best of the economic market, it is advisable to stay invested for a long period of time. Long term equity investments are beneficial as market irregularities are corrected over a period of time via SIP.
Here are a list of things to consider before starting an SIP,
Let us illustrate with an example:
Assume that Mr. A has invested Rs. 6000 (via SIP) per month from June 2006 to March 2015. Keeping this in mind, the total accumulated amount for the entire period is Rs. 636,000 (Rs. 6000 x 106). Due to the power of compounding, Mr. A has accumulated an impressive interest rate of 17% (annualized compounded return).
In short, your investment gets doubled in the long run and a good mutual fund always outperforms the market.
Step 1 - Before parking your money in a mutual fund, it is advisable to check your risk appetite along with the objective of investment. If you are comfortable in taking greater risk, you can select aggressive funds which offer higher returns. If you have low risk, you can select debt mutual funds which offer lower returns. An SIP will help you meet your investment goals. Depending on the financial goal, you can select mutual funds which will help you in achieving it (kid’s higher education, marriage, new car, etc.).
Step 2 - Select the mutual funds which are suitable to your risk tolerance and investment objective. Post selection, you need to follow the mentioned steps:
Step 3 - Post submission, your account with the fund house/AMC will be created and you can begin subscription via SIP. You need to select the date for auto-debit. You can choose multiple dates for SIP installment per month.
Step 4 - Decide the duration of your SIP. You can calculate the SIP amount with an SIP calculator. It is a free tool available online.
Step 5 - Post selection, the SIP will begin from the selected date and your mutual fund subscription will start.
In short, SIP is the most convenient method of investing in a mutual fund online as well as offline. With SIP, you do not have to worry about regularly visiting the bank branch.
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