There isn’t a way as simple as SIP when comes to mutual fund investing. Ever since the introduction of Systematic Investment Plan (SIP), this method of investment has become quite popular among Indian retail investors and is also one of the most preferred mutual fund investment modes. Investors must be KYC compliant to start a SIP in mutual funds. One can start a SIP in any mutual fund scheme simply by logging on to the AMC’s website and navigating to the mutual fund scheme. One may have to create a log in ID and password on the AMC website before starting mutual fund investments via SIP. One can invest in mutual funds via SIP both online and offline but consider the current scenario of the novel coronavirus pandemic it might be better to make an online investment.
What is SIP investing?
What Systematic Investment Plan does is that it gives mutual fund investors an opportunity to save and an invest a fixed sum at regular intervals. These intervals can be weekly, monthly, every three months or twice in a year. Usually investors prefer monthly SIP as a fixed sum is credited from their earnings and debited to the mutual fund portfolio. Investors get the privilege of choosing SIP investment sum but the only catch here being the investment amount that they choose cannot be lesser than the minimum investment sum stated in the offer document.
How do SIPs benefit from falling markets?
SIPs are known to benefit from an investment technique known as rupee cost averaging. You must be aware that investments in mutual funds like equity funds are constantly exposed to market volatility. The performance of a mutual fund scheme with an equity heavy portfolio suffers when the markets are underperforming. However, via SIP one can actually benefit from the falling markets, thanks to the concept of rupee cost averaging. What happens is that there is a sudden decline the mutual fund scheme’s NAV when the markets are low. Since the monthly SIP sum remains constant, investors are allotted more units when the NAV is low. Although the value the units is low, investors must understand that markets are not going to do in the same direction every time, they will eventually normalize. At this point of time, the value of the allotted units will go up too, thus minimizing the investor’s overall investment risk.
This is exactly how SIPs let investors take advantage of the falling markets. Over the long term, rupee cost averaging averages out the investment cost, thus increasing returns and decreasing the investment amount. However, to witness this miraculous investment technique pave the way for building a commendable corpus, investors may have to remain invested in mutual funds via SIP for the long run.
This is somewhat similar to what share market investors follow, buy less when the stock prices are high and buy more when the prices see a sharp downfall. To allow your investment corpus to grow over the years and to allow your monthly SIPs to fetch more units, investors can increase their monthly SIP amount by 10% year after year. This will also allow investors to save more.
Mutual funds offer diversification and active risk management and SIP is the best way to mitigate risk to some extent. SIPs can actually help investors target and achieve their life’s long term financial goals. The key here is to remain invested for the long run and not let human emotions get in way especially when the scheme is underperforming. One may even have to reshuffle their investment portfolio from time to time to ensure that you are investing in funds that hold the potential to help you achieve your goals.