Uncertain about market trends? Invest through mutual fund SIPs

SIPs allow investors to initiate their investments with as low as Rs 500.

   

For an average retail investor, timing his investments may not be an easy task as it requires continuous research and tracking of the market. Thus, investors who tend to time their mutual fund investments often end up in buying more during bull market and under-invest in falling markets. The feature of regular automatic investments through Systematic Investment Plans (SIPs) saves an average investor from trying to time the market.

SIP is one of the best ways to invest in mutual funds. You don't need to think about market's volatility on a daily basis while routing your money through this mode. Even investors with a better understanding of markets should use SIPs as their main investment vehicle and make lump-sum investments only in case of attractive valuations arising out of steep market corrections.

"Financial discipline is one of the most critical factors to meet your long-term financial goals. SIP-based investment ensures investors remain disciplined and their financial plan is on track as a predetermined amount is automatically deducted from their bank account over periodic intervals and invested in selected mutual fund schemes. SIP also averages the cost of units during market corrections and eliminate the need for timing investments," says Manish Kothari – Head of Mutual Funds, Paisabazaar.com.

It is an investment process where you can start your investment with a very small amount of money. You also have the facility to opt ECS deduction option either on a weekly, monthly or quarterly basis. If you are doing investment for a longer term, then in such case it can be a trouble-free mode of doing investment, which can be an impressive factor for risk-averse investors. It is possible as the NAV gets average out over a period of time making your investment less risky in a longer time horizon.

"While the minimum investment amount in case of lump sum investments is Rs 5000, it can be as low as Rs 500 in the case of SIPs. Thus, even a small investor, who otherwise may not be able to invest regularly in mutual funds, can do so by investing through SIPs. The low minimum investment amount also allows small investors to easily diversify their monthly surpluses across several funds," says Kothari.

Power of compounding

SIP enjoys the benefit of compounding which helps in providing inflation-beaten returns. Compounding helps you gain an exponential growth over a time period. To understand it in a more easy way, under this process the interest on interest gets added to the principal amount at every regular interval, which over a time period of time gets multiplied and helps you to create a good amount of wealth.

"Compounding refers to making money on the gains made on the original investment. The earlier you start investing and the longer you stay invested, the higher would your returns from compounding. As SIPs allow investors to initiate their investments with as low as Rs 500, they can start investing early in their life and get higher returns due to the power of compounding," says Kothari.

Rupee Cost Averaging

The possibility of risk minimisation while making investments through SIP mode happens only because of the rupee cost averaging phenomenon which automatically averages out the unit due to market volatility over a period of time. This phenomenon makes it easy for investors to enter into mutual fund investments anytime they want to.

Let us have a look over this example:

Month	Monthly SIP (Rs)	Unit Price	No. of units purchased
January	2000	40	50.00
February	2000	30	66.67
March	2000	25	80.00
April	2000	30	66.67
May	2000	40	50.00
June	2000	35	57.14
Average Units		33.33	370.48

By going through the scenario where taxation is kept constant, if someone who invested the entire amount of Rs 12000 in lump sum in January at Rs 40 per unit, he would have owned only 300 units, and by the time he redeemed his money in the month of June, his investment would have been worth Rs.10500 only. But, by going through an SIP mode, he would have made Rs 12350 at the time of redemption. Note: This example is for illustrative purpose only.

Despite even the market remains volatile, irrespective of the intensity, if you are investing money in a disciplined manner for a specific time period through SIP mode, the increase and decrease of unit prices at that particular time get averaged out. This process liberates an investor to time the market while doing investments.

"SIPs force investors to continue investing during falling markets when most tend to stay away from it or even start redeeming their existing investments. Thus, these forced investments during market crashes helps average their cost of purchases and make higher gains as the market recovers," says Kothari.

Happy investing

Source:Moneycontrol.com