The SIP route is ideal to ensure you invest regularly over a long term
Investing in mutual funds through systematic investment plans (SIP) is an easy and efficient way to increase investment over the long term. Under SIP, an investor commits to a regular investment in a particular mutual fund for a fixed period of time. The fixed amount invested at a regular frequency helps bring in financial discipline.
SIP is the best way to invest in a fluctuating market by reducing your average cost. When you invest a fixed amount every month, the number of mutual fund units you actually buy depends on the market pricing (NAV) at that point in time. Therefore, you tend to buy less units when the market moves up, and more units when the market moves down, averaging out your costs.
Even when the markets go down, SIPs perform better. Historically, SIPs have delivered annualised returns in excess of 20 percent. The SIP option is available with all types of funds like equity, income or gilt. An investor without a lumpsum to invest and without a taste for risk should select the SIP option.
The investor is at a liberty to enter or exit the scheme whenever he wishes, depending on the market conditions. He can redeem his units any time irrespective of whether he has completed his minimum investment in that scheme. Because it is systematic, SIP takes care of both long-term and short term goals. It is a powerful tool that helps to preserve capital and create substantial wealth in the long run. These are ideally suited for investors who wish to stay calm and sail smoothly in turbulent times.
SIPs can be especially effective when used in buying equity funds. The NAVs of these funds can vary widely. Through rupee cost averaging, SIP can make this volatility work for the investor. However, rupee cost averaging may not work well if the market rises continuously. SIP offers more flexibility and helps identify funds that suit one's risk-return profile. In case of SIPs, the asset allocation keeps pace with the investor's changing risk-return profile. Besides, this offers instant liquidity whenever required.
