Investments in mid-cap funds via an SIP yielded larger returns than large-cap funds from 2010 to 2015, says an article published in The Economic Times in August 2015. SIP is that tool that lets you diversify your investments over a long period of time. It is a structured route that lets you contribute towards your mutual fund(s) on a regular basis. Much like mutual funds help to hedge stock market risks through portfolio diversification, SIPs help you tide over market volatility. They also help inculcate the habit of saving and bring discipline to your investment. Your investment advisor may advise an SIP if you are a beginner and cannot invest a large sum of money in various schemes or if you are saving for a long-term goal, such as child’s education and marriage or for your retirement corpus.
How Does an SIP Work?
Through this tool, you can contribute towards the mutual fund on a monthly, quarterly, half-yearly basis and so on. Since its launch in India in 1997, a host of plans have come up, including one that lets you invest daily. All you have to do is instruct your bank for auto-debit. A certain sum of money is auto-debited from your bank every month on a pre-set date. This money is now used to buy units of the mutual fund(s), you wish to invest in. The purchase takes place at the net asset value (NAV) for the day. More units of funds are bought each month and transferred to your demat account. This practice lets you buy fewer units when the prices are higher and more units when the prices are low. This lowers the average investment cost per unit in the long-run. This is called rupee cost averaging.
SIPs allow you to tide over market volatility through rupee cost averaging. They eliminate the need to time the market. Unlike traditional share market investments, which were done during market peaks, you can invest through an SIP both when the markets are rising and when they are falling. In case of rising markets, you benefit from the high value of your fund units. On the other hand, in case of a falling market, you buy the same units at a lower price. It is ideal for long-term investments, since it helps you maximise the power of compounding and rupee-cost averaging. The more money you invest, the more it gets compounded. Contributions are made in open-ended schemes, therefore you can exit and withdraw your money any time you wish you. You can also increase or decrease the amount you wish to invest anytime, with the right suggestions from your investment advisor.
An SIP is one of the most appropriate tools for investment management. It helps to build a significant corpus. You can calculate the expected returns from an average monthly contribution over a period of time at a certain interest rate through the SIP calculator available online. You can also check the ranking of a fund online before investing.