Investing in the markets can help you in accumulating wealth in the future. But the question remains, “why to invest in the market?”. That’s because the income earned from full-time employment might not be enough. While there was a time when the monthly income was enough, nowadays they may not withstand the inflation of the future. That’s the investment tool referred to as mutual funds step in. One may think that for investing in mutual funds, you need to make a one-time lump-sum payment, but that’s not the case if you don’t have the access to the required amount.
To invest in mutual funds, there are two investment modes that are available. There is a lump-sum investment mode. Under lump-sum, you are expected by the AMC to make a one-time payment for the mutual fund scheme. This mode of payment is suitable for you only if you have access to the required funds. The other investment mode is a systematic investment plan or SIP. These plans work the complete opposite of lump-sum investment.
What is a SIP?
A systematic investment plan is an investment mode through which a portion of your monthly income isinvested in mutual fund schemes every month, in place of investing the entire amount at one go like it is done in a lumpsum investment. Investments in SIPcan either be scheduled monthly, quarterly or even semi-annually. Afterinvesting gradually through SIPs, it can become relatively easier to achieve your financial goals.
Asystematic investment planenables you to purchase a certain number of fund units. Irrespective of the market conditions, if you were to continue investing in the fund for a long time, you end up accumulating a considerable amount of wealth.After determining things like the tenure and frequency, you can choose to leave a standing instruction with the bank. With standing instruction, you can choose to automate your investments.By leaving the said instruction, every month, a certain sum is deducted from your bank account into the mutual fund SIP of your choice.
How do they work?
Through a SIP, a fixed sum of money is invested in a specific period. Through these investments, you purchase a certain number of fund units. If you were to continue for a long time, you can invest in the fund during both, the highs and lows of the market. Simplyput, you are not required to time the market to make your investments. The action of market timing can berisky as one can invest at the wrong time. On the other hand, SIP investments remove this factor of unpredictability. Afterdetermining the investment tenure and frequency of investment, you can choose to automate your investments. Leave a standing instruction on your bank to transfer the amount directly from your bank account into the mutual fund scheme of your choice, on a fixed date.
Are there any rules that you need to follow?
Yes, there are some rules that you can follow to make sure that your SIP works in your favour:
- Start as early as possible:
That is the cardinal tip for all kinds of investments. The earlier you start investing, the more you earn returns on your investments. That feature is referred to as the power of compounding.
- Be disciplined; continue investing regardless of the market conditions:
It is also very important to be disciplined while investing in SIPs. After opting for a SIP, please ensure make surethat you don’t discontinue the SIP or even miss on SIP contributions for that matter.If you were to terminate the SIP whenever the market is going through a volatile phase, then the long-term wealth creation will be grossly impacted.
- Please make sure to reviewthe performance of the fund:
You also need to monitor your SIPs on a regular basis. As SIP is known for coming with the potential to offer inflation-beating returns, you need to check if your assumptions about inflation in the future are correct.Doing so will give you an insight if you could be right or overestimated your return assumptions.