Several investors are now switching from conservative schemes like bank FDs to market linked schemes like mutual funds. The primary reason is falling interest rates that have sunk so low, it is almost impossible to target your financial goals by solely depending on such schemes offering fixed interest rates. However, investment in market linked schemes like mutual funds requires one to carry some risk appetite. For example, if you want to invest in equity oriented schemes like small cap funds you need to carry a high risk appetite since small cap schemes are highly volatile in nature. On the other hand, someone looking to invest in a debt scheme like a short term fund or a liquid fund must carry a moderate risk appetite since these funds invest in debt instruments and fixed income securities that generate regular income.
For those who are new to Mutual Funds, a mutual fund is a pool of professionally managed funds that invest across various asset classes and money market instruments for earning capital gains. What a fund house does is that it collects money from investors and invests the capital raised to achieve a common investment objective. To achieve its investment objective, a mutual fund manager has to device an asset allocation strategy and buy / sell securities to help the scheme outperform its underlying benchmark. Mutual fund investors are allotted units just like shareholders receive shares in quantum with the investment amount. The performance of a mutual fund scheme depends on the performance of all its underlying assets as well as the sectors and industries in which it invests.
If you are a new investor or a first time mutual fund investor, you can kickstart your investment journey by starting a monthly SIP in a mutual fund scheme of your choice. A Systematic Investment Plan or SIP is an easy and convenient way of investing in mutual funds. All an investor has to do is complete all the pre-investment formalities, decide on the monthly SIP amount and instruct their bank to allow auto debit. Post which every month on a fixed date the predetermined amount is debited from the investor’s savings account and electronically transferred to the fund.
What are the benefits of SIP investment?
Starting a mutual fund SIP holds several advantages. An investor who is unaware about how much she needs to invest every month in a particular mutual fund scheme to achieve her life’s financial goals can refer to SIP calculator, a free online tool that is easily accessible to everyone. SIP is flexible which means investors can change their monthly SIP amount and modify as per their income needs. If there is a cash crunch, you can even choose to skip that month’s SIP. There is no penalty involved for stopping or skipping your SIP investments. If the mutual fund scheme is underperforming, you can immediately stop your SIP investments in that particular scheme and switch to a better performing fund.
Also, those who keep a long term investment horizon and continue investing in mutual funds via SIP, such investors are known to benefit from power of compounding. In mutual funds, the term compounding refers to the interest earned on the interest earned from the principal investment amount. Those who wish to witness their small SIP amounts transform into a large corpus, they must continue investing in mutual fund schemes via SIP for a minimum period of 10 to 15 years.
Before starting a SIP in a mutual fund scheme, please talk to your financial advisor for further assistance.