Mutual Fund’s Systematic Investment Plan (Mutual Fund SIP) is a smart way of investing money in mutual funds. SIP allows you to make smaller periodic investments (usually on a monthly or quarterly basis) rather than a lump sum, one-time investment e.g. it (SIP) enables you to invest Rs. 1000, ten times over a period of time instead of paying Rs. 10,000 at one single instance. This ensures that an ordinary person with low income can also invest in mutual funds. He or she can start investing regularly in small amounts starting from Rs. 500 or Rs. 1000 rather than making a large one-time payment.
How does Mutual Fund SIP work?
While filling up the SIP registration, you have to mention the amount you want to invest on a regular basis, the date from when you want the amount to be debited from your bank account and the investment period.
The investment amount can vary from scheme to scheme and AMC (Asset Management Company) to AMC, depending upon the type of scheme, fund manager, portfolio allocation and several other factors.
For starting a SIP in any fund you need to provide a signed cheque of your savings account of the same amount for which you want to start an SIP.
Once your enrolment form is submitted along with cheque, the AMC starts to debit the amount from your account on specified date up to the time you have mandated it for. Additional units of scheme are purchased at the market rate and credited to your account after every investment.
Mutual Funds Types:
There have several types of Mutual Funds. And we can divide them them in 3 major types which is mentioned below-
Benefits of SIP
Power of Compounding
If you invest Rs. 5,000 per month, assuming a rate of return of 13% per annum, then in 5 years (after having invested Rs. 3 lacs), the value of your investment will approximately be Rs. 4.15 lacs. And in 10 years (after investing Rs. 6 lacs.), your entire corpus will approximately be Rs. 11.84 lacs.
The basic premise of power of compounding states that one should start investing early in life as the benefits of compounding increase exponentially with the increase in tenure of investment.
Rupee cost averaging
SIP provides you the chance to avail the benefit of rupee cost averaging. Every investor likes to buy more units when the price is lower to reduce his/her average cost per share and sell when the price is higher.
But a SIP does this automatically. When you invest regularly through SIPs, there will be days when the stock markets are down and the fund’s NAV is also down. On such days you will automatically receive more number of units for your investment amount.
This means that when you finally redeem your investment years later when the markets are significantly up, you will receive a higher amount.
Usually, investors don’t tend to make regular investments and end up paying a single lump sum amount at one go at the end of every financial year in the month of March.
Because SIP is a systematic and hassle-free way of investing, it ensures that you are investing on a regular basis and gets you the benefit of averaging returns over a period of time.
How We Can Make Analysis Mesure Mutual Fund Risk
This pic will describe how we can mesure and make analysis about mutual fund investment risk.
Types of Mutual Fund SIP
The SIP Top-up scheme enables the investors to increase their investment amount after a fixed tenure e.g. if your current SIP amount is Rs. 4000 per month and you want to add Rs. 1000 to it from next year onwards; you can choose this option on SIP registration form and mandate the fund house to debit Rs. 5000 from your account from next year onwards.
There is no compulsion on investor to continue SIP investments for long periods of time. He or she has the choice to discontinue the plan any time. Moreover, investors have the freedom to increase or decrease the amount being invested as per the prevailing market condition.
Why Mutual Fund SIP
As we above mentioned that mutual funds have several benefits and for availing maximum benefits we should start SIP. We can see why we should start SIP and with benefits through graphics-