Looking at the current market situation, you might feel this is not the right time to invest as the markets are volatile due to slow economic conditions owing to global spread of deadly coronavirus. The impact has aggravated in most sectors due to extended lockdown in the country which is now at a stage of phased unlock.However, to create wealth for the long term, this would be the best time to invest in equity markets. Wise people say, “little drops of water make up the mighty ocean.” And it is amazingly accurate and perfectly fits the wealth appreciation through mutual funds SIP.
SIP is just a modest way to start a mutual fund portfolio and it can prove to be the most powerful tool for wealth building.
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What Is SIP?
SIP refers to Systematic Investment Plan, which is similar to recurring deposit in a way that a specific sum of money is required to be invested periodically. Generally, a bank account is required to be assigned for direct debit or ECS facility for such SIP investment. Every mutual fund house offers investment in mutual funds through the SIP route.
Advantages of SIP
SIP can be started with any minimum sum prescribed (minimum Rs.500 per month), but afterwards can be topped up with additional sum of money as and when excess funds are available. This means that additional units can be purchased through SIP route as and when excess money is available. Such flexibility increases the attractiveness of the SIP route.
- Compounding effect
SIP leads to wealth appreciation as the amount contributed periodically is invested over and over again along with the return earned on the principal. This yields better when the investment tenure is longer and the investor has entered into the investment at much early age. Compounding effects can provide for a good swell in your mutual fund portfolio.
Even a small investor can enter mutual fund investments through the SIP route. This is because only a specific sum committed at the beginning of mutual fund SIP is required to be invested periodically.
Even conventional and conservative investors can easily opt for the SIP route because money at stake is much lower (even if we accumulate lowest contributions for a longer term), but return on such investment and wealth appreciation is very lucrative, especially in case of equity mutual funds. So those who do not wish to enter the stock market directly, but wish to enjoy stock market ups and downs, SIP is an ideal way to go in.
- Professional management
Even though you are sparing for management fees while you purchase a mutual fund through SIP, it is worth every penny spent, because your funds are managed by experienced and academically well off fund managers. This gives you an extra edge over common equity shareholders, who trade in the markets on the basis of individual experience and study.
- Inflation effect
Inflation is the real enemy of your future income earning capacity. Inflation reduces the returns in real terms. For e.g. if Rs.100 is what is needed to buy 10 bottles of juice, then considering 10% inflation rate, next year, you will only be able to buy 9 bottles of juice.
This means that inflation reduces the purchasing power, thereby creating a need for inflation-adjusted returns in the long run. Mutual fund returns are usually inflation-adjusted, as there they provide returns more than the inflation rate in the long run.
- Rupee cost averaging
SIPs give us an added advantage of rupee cost averaging which refers to lower average costs than different individual purchase costs (which at times may be higher in case the markets are bullish) of various lots of mutual fund units, purchased at different point of times.
Rupee cost averaging yields better results especially when markets are bearish and end up in down trending stock prices. This results in lower NAV, meaning that a fixed sum of SIP amount will be able to purchase more number of units as compared to a bullish market scenario.
SIP in mutual funds is not restricted only to equity markets, but also to debt funds or hybrid funds or even gold funds etc. There could be any type of underlying asset for the mutual fund, so if you invest in different types of mutual funds (equity, debt, hybrid, gold, emerging equity, GILTs etc.) with a minimum sum allocated to each of those, you may enjoy a balanced bouquet of returns, as well as decent wealth appreciation as compared to conventional modes of investment like a bank, fixed deposits etc.
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How to build a mutual fund portfolio through SIP?
- Diversification is the key
As discussed herein before, mutual fund SIPs are the cheapest way to diversification within the investment portfolio. Hence, it is important that you should invest in SIPs of various mutual funds with different underlying assets like equity, debt, gold etc. This would offer you superior returns, when markets are spurting growth and at the same time, will ensure minimum risk to the principal invested, when markets are falling down.
- Align your mutual fund to your financial goals
Every individual has different financial needs and hence has different financial goals at each age group. Hence, it is better to align the mutual fund SIPs according to your investment strategy based on long term and short term financial goals. For e.g. it is better to invest in equity mutual funds SIP, if you are investing for your retirement corpus which is a long term investment.
- Don’t hustle
The markets are usually much heated and are very volatile, so it is very common that NAV will keep fluctuating every now and then. However, there is no need to panic and get out of mutual funds, when markets fall down. If you stay put for 1-3 years for short and mid-term goals and 5 or more years for long term goals, then you may very well be richer than you already are, giving you benefit of rupee cost averaging.
- Age appropriate investment
For e.g. if you belong to the age group of 25-35, then equity exposure in your mutual fund SIP portfolio should be almost around 60-70%, which would earn superior returns and will offer tax benefits also (for equity), thereby increasing the effective rate of return.
Reverse is the case when your age progresses, which means you should concentrate more on balanced funds which provide reasonable returns with moderate or low risk.
- Focus on long term
If you are investing in SIP for mid-term or long term goals like kid’s education or retirement planning, then it would be better if you are invested for at least 3 years in any particular mutual fund. For e.g. compare the returns generated by any mutual funds for 1 year, 3 year and 5 years. You could observe that funds have generated higher returns in 3rd year or 5th year. This is because of the compounding effect.
Now that you are aware of all the features and benefits of investing through SIP, do not waste any more time and start investing. You can download the Fintoo App to start your SIP today.