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Are you looking to invest in equity mutual funds but fear the market volatility? Take heart. There is a great way to beat market volatility and get the best from your mutual fund – have you heard of SIPs? Here is what you should know about this powerful method of creating wealth.
It is a well-known fact that over the long term, equities have always generated returns that outperformed those from other asset classes, including gold and real estate. But direct investment in equities means you need to have plenty of money to get substantial returns from just one stock. Instead, you can derive benefits of equities by investing in mutual funds that invest the investors’ monies across various stocks and sectors, by investing the minimum investment amount, as specified by the fund. This amount is generally $125 for most of the funds.
But what if you cannot spare this amount? What if the market crashes the day after you invest? What if you want to invest regularly? Of course, you can do so by using SIP.
What is SIP?
SIP stands for Systematic Investment Plan. Here, you invest a fixed sum with a particular frequency in the fund of your choice for a predetermined period -- either six months, a year, or more. The frequency could be monthly, quarterly or once every six months. The amount could be as low as $12.5 for most funds. However, for Reliance and ICICI mutual funds, you can even set an amount as low as $2.5 and $1.25 respectively.
How does the SIP work?
SIP works by capitalizing on the volatility in the stock market. For example, if you invest $100 when the NAV is $10, you get 10 units of the mutual fund. Now, when you invest $100 the next time and the market has crashed, with the NAV of the fund becoming $5, you get 20 units. Assume that when the third SIP investment is due, the market has gone up and the NAV becomes $20, and you get five units for your $100. So, in all you get 35 units of the fund, whereas a one-time investment of $100 would have fetched you just 10 units when the NAV was $10 units.
How does the SIP benefit me?
SIP helps you in following ways:
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Reduces the average cost of purchasing.
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Teaches you disciplined investing, thus helping you achieve your financial goals quicker.
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Eliminates the excuse for not investing because of insufficient funds.
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Eliminates the headache of timing the market.
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Higher returns than those from one-time investment.
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Flexibility, as you can decide on the amount, frequency and duration of investment and can also hike or reduce any of these variables as per your circumstances.
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Effortless, as you just have to fill in the application and direct debit mandate and the amount will be debited from your bank account on the specified date. No need to sign checks or remember the date of payment.
Now that you know the wonders of this powerful tool, go ahead and sign up for the SIP. But remember, before that, check out the fund’s performance as the SIP cannot guarantee good returns if the fund selected is a poor performer. |
