A Systematic Investment Plan is an easy and hassle free way to invest in mutual funds. Thanks to modern investment tools like SIP, even those with a low monthly income can invest in mutual funds to target their life’s short term and long term financial goals. That’s because there are some SIP plans where an investor can invest a minimum amount of Rs. 500 per month and expect to earn some capital appreciation over the long term. Earlier people lived under the common notion that one only the elite and high income earners can invest in mutual funds. That’s because the only way to invest in these market linked schemes was by making a one time lumpsum investment. Not everyone had that kind of idle cash at their disposal to invest. But thanks to SIP, it has now become possible for everyone to invest in mutual funds and generate capital gains through systematic investing.
How does SIP work?
If you are unsure about how much money you invest in mutual funds through SIP, you can use an online SIP calculator. It’s a simple calculator where you can enter the amount you want to achieve over a stipulated period of time, and it will tell you much you need to invest regularly to achieved the desired amount. However, do remember that these are approximate values and may fluctuate depending on interest rates.
In order to be able to invest in mutual funds through SIP, one needs to be a KYC complaint individual. Know Your Customer (KYC) is a standard procedure initiated by all Asset Management Companies (AMCs) and fund houses in order to validate the identity of the investor. Once you are KYC compliant, you can even invest in mutual funds via SIP from the comfort of your home or office. All one needs is an electronic device like a smartphone or a laptop with a decent internet connection and you can start a SIP in mutual funds from possibly any corner of the world. Once you instruct your bank that you want to initiate SIP in mutual funds, even month on a fixed date a predetermined amount will be debited from your savings account and electronically transferred to the fund.
How can you use SIP for long term wealth creation?
Investors need to understand that a Systematic Investment Plan only works well over the long term. That’s because when you start a mutual fund SIP, you will be making small payments every month towards your portfolio. For these small investment amounts to multiply and turn into a commendable corpus, one needs to have long term investment horizon. Also, long term investments tend to benefit from the power of compounding. In mutual funds, compounding refers to the interest earned on the interest earned from the initial investment amount. Since you are not going redeem the mutual fund units over the short term, the gains earned by the scheme are invested back in it. Not only do you invest every month through SIP, the interest that you earn from these investments gets reinvested. Over the long term, this might help investors create wealth.
Also, when you start a mutual fund SIP are limiting the exposure of market volatility. For example, if you invest in an equity fund by making a one time lumpsum investment, you entire finances are exposed to market volatility right from the beginning of the investment cycle. However, with SIP only investment amount that gets added to your portfolio on a monthly basis stands exposed to market fluctuations.
SIPs do hold the potential to offer capital appreciation over the long term but investors should determine their risk appetite before investing.