5 minsJanuary 31, 2019
Mutual funds are one of the promising investment avenues for wealth creation, provided you are willing to assume some market-linked risk which may negate over a long term investment horizon.
As per new SEBI MF classification, there are five categories of mutual funds –– equity-oriented, debt-oriented, hybrid-oriented, solution-oriented and other schemes (index funds and fund of fund schemes), and each of these caters to
a set of investment objectives or needs. Depending on your risk profile, investment objectives, financial goals, and the time horizon to accomplish the financial goals, you should invest in these respective categories of mutual funds.
If you have long-term financial goals to accomplish viz. your child’s future needs (education and wedding expenses) and your retirement, equity-oriented funds and aggressive hybrid funds would be an appropriate choice. Of course, there is
a certain degree of risk involved in these, but it can be managed via a Systematic Investment Plan.
Systematic Investment Plan or SIP is a mode of investing in mutual funds in a regular and systematic manner –similar to a recurring deposit with the bank, where you deposit a fixed sum of money regularly. The only difference in case of SIP
is that your money is invested in a mutual fund scheme you’ve chosen and the returns clocked are variable, i.e. market-linked. Therefore, investment in mutual funds is subject to market risk.
Depending on your convenience, you have the option to choose your SIP date and the frequency of your regular investments – which could be on a daily basis, monthly basis, or on a quarterly basis. Your investments will be carried out vide
a NACH/ECS mandate, where on the chosen SIP date, the bank will debit your account and the money will get invested in the respective mutual fund scheme systematically.
Through the SIP mode, you can invest as little as Rs 500 a month in mutual funds. So, if you cannot invest a lump sum amount for whatever reason, it does not impede the process of wealth creation.
Remember the adage: Every drop makes a mighty ocean. Say you need Rs 50 lakh for your child’s higher education 15 years from now. Starting a monthly SIP of approximately Rs 9,900 can help you get there assuming the mutual fund scheme clocks
a return of 12% CAGR.
Note that there is no such thing as best SIPs; you need to select the best mutual funds to SIP into. These MFs must have a consistent performance track record and should be from a fund house following a robust investment philosophy and processes.
Here are five key benefits of SIP:
1. Rupee-cost averaging – SIP helps to reduce the shocks of a volatile equity market vide rupee-cost averaging. Thus many times, as opposed to a one-time lump sum investment, SIP works better.
Under rupee-cost averaging, you would typically buy more mutual fund units when prices are low, and similarly, buy fewer units when prices are high. This infuses good discipline since it compels you to commit cash at market lows when other investors
around you are wary and exiting the market, and vice versa.
2. Makes timing the market irrelevant – When you invest in mutual funds, what is important is “time in the market” and not “timing the market”. SIP facilitates absorbing market shocks and the volatility
in the journey of wealth creation on account of rupee-cost averaging.
3. Power of compounding – SIP infuses the habit of investing regularly and systematically with the necessary discipline. This over the long-run can help you compound your wealth as you endeavour to achieve many vital financial
goals of life.
4. An effective medium of goal planning – You may have a variety of financial goals, but particularly for the ones with a longer time horizon, viz. your child’s future needs and to build a retirement corpus, SIP in
equity mutual funds is an effective medium. The earlier you start an SIP with a commensurate time horizon, you can build a bigger corpus.
5. Easy on the wallet – SIP facilitates you to invest small amounts at regular intervals (daily, monthly or quarterly) thereby reducing the stress of investing in a lump sum while you endeavour to address your financial
However, before you invest in mutual funds via the SIP route, make sure you are well-aware of the purpose for which you wish to start an SIP. As far as possible, avoid investing in an ad hoc manner or aping what your friends and relatives do.
Investing is an individualistic exercise. Further, ensure that the SIP tenure is long enough ––at least 5 years; and finally, make sure that you select the best mutual fund schemes to SIP.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.