Is investing in Mutual Fund SIP really worth it?

A Systematic Investment Plan (SIP) is a tool that allows you to invest in a disciplined manner. In a SIP, the amount is fixed and is deducted from your bank account at fixed intervals like weekly, monthly, quarterly, or semi-annually and MF units worth the amount are purchased.

Before diving into whether investing in SIP is worth it, let us first understand what mutual funds are and how they work.

What is a mutual fund and how does it work?

A mutual fund is a pool of money contributed by multiple investors with a common investment objective. The pool of funds is managed by a professional fund manager to achieve the desired results.

Fund managers invest the money accumulated in a wide array of assets such as stocks, bonds and other instruments and then manage the portfolio, deciding when to buy and sell investments aligned to the overall investment objectives.

Mutual funds are usually recommended for  investors who lack experience or time and would instead put their faith in an expert in the field.

There are two broad ways in which you can invest in a mutual fund schemes:

• Lump-sum: Through this method, investors accumulate a pool of savings and invest the money in mutual funds at one-go. The value through such investments is high, but the frequency of investment remains low and does not follow any specific payment schedule.

• SIP: Investments made in parts or relatively small but frequent instalments ­ are called Systematic Investment Plan (SIP).While a lump sum investment requires you to pay your desired sum of money in a single payment mode, SIP allows you to invest a fixed amount of money at fixed intervals of time. The intervals can be weekly, monthly, quarterly, or semi-annually as per your convenience.

Most mutual fund advisors usually recommend SIP in equity mutual funds over lump sum investments, as it gives you the flexibility to invest in various stages (highs and lows) of the market. Moreover, SIP is also a much more convenient tool for salaried investors to carve out savings and invest in mutual funds regularly.

Benefits of SIP:

• Convenience – SIP is known for its hassle-free process, as it does not require you to take time out from your busy schedule to make your investments regularly. Standing instructions can be given to your bank or broker to automatically debit the amount from your account and credit mutual funds units at regular intervals.

• Compounding – The idea behind compounding is that a small amount of money regularly invested over some time can grow in to a large sum. As an investor, you will make gains that include your contribution, along with the returns compounded over the years. Therefore, through the power of compounding, you will be able to accumulate a substantial amount of wealth over time.

• Rupee Cost Averaging – When you invest a fixed pre-decided amount regularly, the average cost per unit drops. As the SIP invests in fixed intervals, some units are acquired at lower prices, which compensate for the units purchased at high prices. This rupee cost averaging removes the pressure of timing the market for investors, while also economically benefitting from profits on the sale of accumulated units.

Investing in SIP is definitely worth it, as investors can bring in discipline to their frequency of investments, while also earning better margins from such investments. Reach out to experts to know more about how you can plan your investments in mutual funds effectively to achieve your investment objectives.