A mutual fund is a pool of professionally managed funds that invest in a portfolio of securities and other money market instruments. Depending on the nature of the scheme and its investment objective, a mutual fund scheme may invest across fixed income securities, asset classes and money market instruments like company stocks, equity, company fixed deposits, debentures, commercial papers, etc. If you are new to mutual funds, you might not be aware that there are multiple ways to invest in mutual funds. A retail investor can either start a monthly SIP or they can make a lump sum investment.
But is it better to start a monthly SIP or shall you invest in mutual funds via lump sum investment? To understand this in a better way one must first understand the difference between the two.
What is SIP? What is lump sum?
A Systematic Investment Plan or SIP is an easy and convenient way of investing in mutual funds. Earlier, mutual fund investors only had the option of making a one time lump sum investment. If you have surplus money that you recently inherited or is sitting idle with you for a long time, you can make a lump sum investment towards the mutual fund scheme of your choice. However, if you are investing in high risk investment schemes like mutual funds, making a lump sum investment might expose your entire investment amount to market volatility.
A Systematic Investment Plan on the other hand allows investors to invest small amounts at regular intervals. An individual can decide on an amount he / she is comfortable investing on regular basis and invest this amount via SIP in a mutual fund scheme of your choice. However, the SIP amount that you choose cannot be lesser than the minimum investment amount mentioned in the offer document.If you are a KYC compliant individual, you can start investing in mutual funds via SIP from the comfort of your home or office using a smartphone or a laptop with a decent internet connection.Those who are new to SIP investing, such individuals can refer to SIP calculator, a free online tool that might help you determine an estimate on the capital gains you may earn at the end of your investment journey.
SIP is the key to your financial success
If you aren’t happy with your existing wealth and wish to improve it over the long term, then you should start a SIP in a mutual fund scheme of your choice.That’s because systematic investing through SIP is known to allow investors to benefit from compounding. In simple words, when you start earning interest from the interest earned from your initial investment amount, it is referred to as compounding. Power of compounding holds the potential to turn small investment amounts into a large commendable corpus. However, one must make sure that theydo not break the loop and continue investing in mutual funds via SIP till their investment objective is achieved.
Another unique investment tool which SIP investors can benefit from is referred to as rupee cost averaging. When the NAV of the scheme is low, more units are allotted. Similarly, when the NAV of the mutual fund scheme is high, lesser units are allotted. This adjustment of units depending on the fluctuating NAV is referred to as rupee cost averaging and is also known to minimize investment risk as well.
SIP does the potential to help investors with their life’s long term financial goals. However, if you are new to mutual funds or investing in general, it is better to consult a financial advisor before investing.