Mutual Funds are professionally managed funds where the fund manager managing the fund has the responsibility of implementing a decisive investment strategy so that the scheme is able to achieve its investment objective. The reason several investors are shifting from traditional investment schemes to mutual funds is because they are known to offer for better capital appreciation as compared to traditional investments. Depending on the nature of the scheme and its risk profile and mutual fund may invest across various asset classes like equity and debt. Apart from this he may also invest across various money market instruments like government securities, corporate bonds, gold, real estate, certificate of deposits, debentures, treasury bills etc.
One noticeable thing about mutual fund investments is that more and more investors are opting for systematic investment plans over the traditional lump sum investment. The traditional way to make an investment to make a one-time lump sum investment. The advantage lump sums investment hold is that investors receive units in large quantities depending on the fund is the existing net asset value (NAV). However there is a drawback for making a lump sum investment. Mutual funds like equity funds are constantly exposed to market volatile nature. When you make a one-time lump sum investment you are exposing your entire investment amount to market vagaries.
On the other hand, a systematic investment plan or SIP is an easy and hassle free way to invest in mutual funds. Systematic investment plans work in such a way that only a restricted amount of investor’s money remains exposed to market vagaries. That’s because when you opt for a systematic investment plan, every month on a fixed date a predetermined amount is debited from your savings account and electronically transferred to the mutual fund. Show only the amount that your investing on the monthly basis is exposed to market volatile nature and not the entire investment amount. Suppose you wish to invest 1 lakh rupees in a Bluechip fund and make a lump sum investment, you will be exposing the entire investment amount to market volatility right from the beginning of the investment cycle. But if you start a SIP of 5000 rupees for 20 months, only the amount which is added to the mutual fund on a monthly basis will be exposed to market’s volatile nature and not the entire investment amount which is rupees Rs. 1 lac
Another advantage one holds for starting a mutual fund SIP is that the Investments tend to benefit from the power of compounding. However, one needs to have a long term investment horizon and inculcate the discipline of investing regularly if they wish to witness the power of compounding. Compounding has the potential of multiplying small investment amounts and turning them into large corpuses. Let us explain to you how compounding in mutual funds works. Compounding is nothing but the interest earned on the interest earned from the initial investment amount. Whenever a mutual fund scheme generates profits these profits are invested back in the scheme. Over the long-term, thanks to the power of compounding the small SIP investment amounts can multiply and turn into a commendable corpus.
The reason the Systematic Investment Plan was introduced was so that investors from all walks of life can invest and grow their wealth. Today mutual funds lets investors to start a SIP with a monthly investment amount as low as Rs. 500 per month. You know you don’t need a large surplus at your disposal to start investing in mutual funds. Thanks to the convenient and hassle free investment to like a SIP, even those who fall under the low income earning can invest and give themselves an opportunity to fulfill their financial goals for a long term. One can refer to an online SIP calculator in order to determine how much money they need to invest at regular intervals that is able to get closer to the ultimate financial goal.