David Thacker
If you are someone who is keen on improving their existing financial condition and looking to build wealth over the long term then you need to make a financial plan first. We all have some goals in life that we went to achieve. As humans it is quite natural to be emotionally attached to our goals. Financial planning helps individuals to determine their short term and long term goals. Investors with a defined set of goals usually succeed in investment planning. Without proper planning and strategy, it might become difficult to spread out your investments in the right asset classes.
If you plan to invest in market linked schemes like mutual funds, then you invest according to your risk appetite. Determining one’s risk appetite may help them spread their finances across multiple asset classes. Mutual funds are a pool of professionally managed funds that invest across asset classes depending on the nature of the scheme. What a fund house does is that it collects money from investors sharing a common investment objective and invests this pool of money across various money market instruments. Mutual funds invest in both foreign and Indian economies to help the scheme outperform its underlying benchmark.
The best way to invest in mutual funds is to start a Systematic Investment Plan (SIP). SIP is an easy and convenient way to invest in mutual funds. Earlier, the only way to invest in mutual fund schemes was to make a one-time lump-sum investment. However, when you make a lump sum investment you pay the entire investment amount right at the beginning of the investment cycle. You are actually exposing all your finances to the equity market’s volatile nature. On the other hand, when you start a mutual fund SIP, you can invest small amounts at regular intervals. All you have to do is complete a one time mandate with your bank following which every month on a fixed date a predetermined amount is debited from your savings account and electronically transferred to the equity fund.
Here’s why you shouldn’t stop investing in mutual funds via SIP:
SIPs are ideal for long term investments
If you have long term financial goals like building a corpus to financially secure your sunset years, or if you are looking to give your daughter the destination wedding she always dreamed or if you are keen on sending your children overseas for foreign education then you consider investing in mutual funds via SIP. With SIP you can invest small amounts as long as this amount is the same as the minimum investment amount mentioned in the offer document. Long term investments need periodic investments which cannot be skipped. SIPs can help you achieve life’s long term financial goals through systematic investing.
Benefit from power of compounding
In mutual funds, compounding refers to interest earned from interest earned from the initial investment amount. When your mutual fund scheme makes profit, this amount is invested back in the scheme. In the long run one can benefit from compounding as the interest earned keeps multiplying. However, one can only benefit from compounding if you invest in mutual funds via SIP for the long run.
Rupee cost averaging
Mutual fund investors are allotted units depending on the fund’s existing net asset value (NAV). When the NAV is low, more funds are allotted. Similarly, the NAV of a mutual fund is high, more units are allotted. This is referred to as rupee cost averaging and only possible through SIP investments.
Long term investments in mutual funds via SIP can also help one beat inflation. However, investments in mutual funds do not guarantee returns. It is better to keep a diversified portfolio to avert losses.
