START A SIP
WHAT ARE THE METHODS TO INVEST IN MUTUAL FUNDS?
WHAT IS SIP?
SIP, also called the SYSTEMATIC INVESTMENT PLAN tops the best route to invest your money in a mutual fund. It is a systematic way of investing a fixed sum regularly in the stock market through mutual funds on a daily, weekly or monthly basis for as low as INR 500. It gives the investor the freedom to choose the amount of investment and frequency while averaging out the cost of investment over a period of time.
Yes, as explained above mutual funds offer investors economies of scale as the investor money is invested on a macro level in a wide variety of companies, which in turn minimises risk.
HOW DOES SIP FUNCTION ?
HOW DO SIP UNITS GROW ?
TIME PRINCIPLE IN SIP WORKS IN FAVOR OF THE INVESTOR
SIP takes advantage of the time principal of mutual fund investment, enabling the investor to invest at different time ranges of the evolving market. Regardless of the market conditions, the investor invests regularly on a fixed date over a period of time.
LET’s DO SIP MATHEMATICS
Let us check the above with an example here.
Suppose you are investing Rs.10,000 in a month when the NAV is Rs.10, you will get allotted 1000 units because 10000/10 = 1000 units. Next month, on your SIP date, when the NAV is Rs 8, you will get allotted 1250 units 10000/8= 1250 units. Next month, on your SIP date, if the NAV moves to Rs 12, you will get allotted 833.3. units, as 10000/12 = 833.33
You bought more units when the markets were lower, taking advantage of the dips in the market. As the experts tell us ‘Buy Low, Sell High’. SIPs follow this rule effectively and accurately. Over a period of time, the greater the number of units accumulated, the higher the returns can be. As the NAV would keep increasing over the years, it would deliver a high rate of return for the NAVs bought a low levels. So at the time of redemption, SIP units can give you a fantastic return in the medium to long term.
A financial advisor can help you to monitor your portfolio to analyse it for the perfect exit in profits as the Rupee Cost Averaging neither ensures you profits nor protects you from making a loss in declining markets. Therefore, for Mutual Funds and SIPs to give good returns patience, consistency and discipline are required.
BENEFITS OF SIP
LUMPSUM MUTUAL FUND INVESTMENTS
KAUTILYA’s experts advise Systematic Investment Plan as the best route to start your investment journey in mutual Funds. But if it is pertinent due to some reason or for tax saving purposes as in the case of ELSS, the investor can go for lumpsum investment in mutual funds. The lumpsum investment does not give the cost averaging factor that is advantageous to bring down the purchase cost of Mutual Funds.
SYSTEMATIC TRANSFER PLAN (STP)
A better alternative to Lump Sum mutual funds is the Systematic Transfer Plan (STP). In this plan, a regular transfer of funds in small installments takes place from one mutual fund scheme to another scheme house under the same Mutual Fund house or AMC. This regular transfer is the same as the SIP route but here the lump sum money is first deposited in a liquid mutual fund scheme which does not have a lock in period or penalty for premature withdrawal. Instructions are given to the Liquid MF to transfer a fixed sum of money just like in the case of a SIP to an equity, debt, balanced or hybrid mutual fund scheme.