What is a mutual fund and what is a SIP?
A mutual fund is a pool of assets in which you get proportionate ownership by purchasing units. These are highly liquid and can be sold either online or offline. The idea behind a mutual fund is to get you the benefit of diversification of risk. On your own you are limited by your capital to invest in equities. By buying mutual funds you can get the benefit of diversification with the same investment and thus reduce your risk. You also get the b onus of professional management as the fund manager of the mutual fund is an expert who has a huge combined experience in markets and also an expert team at his disposal.
The SIP, on the other hand, is just a method of investing in a mutual fund. You can either reinvest in mutual fund as a lump sum or as a SIP. The SIP stands for Systematic Investment Planning. It allows you to invest systematically, and it could be weekly, monthly or quarterly based on your preference. But, the most popular method of doing SIP is the monthly format as it also enables you to sync your mutual funds with your inflows. SIP gives you some special advantages in mutual fund investing as it is more in sync with your income flows and also proffers the benefit of rupee cost averaging (RCA). SIP is just a scientific and proven tool of investing in mutual funds, especially equity funds.
What are the unique benefits that an investor gets from a SIP
SIP is an option of investing a fixed sum in a mutual fund scheme (normally an equity or ELSS scheme) on a regular basis i.e. predefined intervals of wee, fortnight or month. It is similar to regular saving schemes like a recurring deposit in a bank or a post office. Here are some of the key advantages of opting for SIPs as a tool of mutual fund investing.
- It is a tested method of minimizing risk and yet enjoying good returns, by regular, periodic investment, over a long period of time. By spreading your investment across the time horizon, you tend to get the best price even in volatile markets. You may not catch the bottom of the market but you are as close as possible.
- SIP gives the power of rupee cost averaging which is nothing but staggering your investments over the whole financial year. It will help you to average the cost of purchase and beat volatility. Indian households invest close to Rs.7500 crore each month through equity SIPs. That is how popular it has become.
- Above all, it brings financial discipline to your life. You are forced to treat investment as a discipline and treat your expenses as a residual item. That is how savings and wealth are built and mutual fund SIP is perfectly synchronized with that.