Mutual funds SIP is what I am covering for every reader of the blog. Now, investing in mutual funds is like an investment made by a collective effort. An individual as a single investor is likely to have a lesser amount of money at disposal than say, a group of friends put together.
Now, let’s assume that this group of individuals is a novice in investing and so the group turns over the pooled funds to an expert to make their money work for them. This is what a professional Asset Management Company does for mutual funds.
An AMC invests the investors’ money on their behalf into various assets towards a common investment objective.
What mutual fund do which makes them exclusive?
Hence, technically speaking, a mutual fund is an investment vehicle which pools investors’ money and invests the same. The same investment for and on behalf of investors into stocks, bonds, money market instruments and other assets.
The money is received by the AMC with a promise that it will invest in a particular manner by professional managers. These professional managers are commonly known as fund managers. The fund managers have to honor this promise. Furthermore, the watchdog SEBI (Securities and Exchange Board of India) and the Board of Trustees for each mutual funds ensure that this actually happens.
Thus, a mutual fund is a vehicle that enables a collective group of individuals to –
- Pool their investible surplus funds and collectively invest in instruments/assets for a common investment objective.
- Optimize the knowledge and experience of a fund manager, a capacity that individually they may not have
- Benefit from the economies of scale which size enables and is not available on an individual basis
What is SIP for?
SIP is a systematic investment plan. It is a process to invest your money in mutual funds. You can also make an investment through a lump sum one-time payment. SIP is a direction given to your bank savings account for deducting a fixed amount on a fixed date every month. This amount goes to buy units of mutual fund scheme that you chose SIP for.
What makes SIP and lump-sum investment possible with mutual funds?
To understand this we need to understand the basic classification of a mutual fund. Typical classification of mutual fund schemes depends on the various basis. Keep in mind that the tenor refers to the ‘time’. Furthermore, the classification of mutual funds on the basis of time makes both types of investment possible.
The classifications are open-ended and closed-ended mutual funds schemes. Open ends mostly cater the need of SIP. While closed-end mostly fulfills lumpsum investment needs.
1. Open-ended funds
These funds are available for subscription throughout the year. These funds do not have a fixed maturity. Investors have the flexibility to buy or sell any part of their investment at any time, at the prevailing price (Net Asset Value – NAV) at that time.
2. Close-ended funds
These funds begin with a fixed corpus and operate for a fixed duration. These funds are open for subscription only during a specified period. When the period terminates, investors can redeem their units at the prevailing NAV.
Why marry mutual funds SIP altogether?
Marrying mutual funds SIP to meet all your financial goal in future is what we suggest for everyone. Especially, for people who are salary dependent. Not only this, even it benefits all small businesses owners. To understand this let us see what characteristics make it possible.
1. Start, stop or skip SIP anytime
The greatest benefit that I think of SIP investment is this. Yes, you can start a new SIP any time. Anytime you have the additional money go and start one SIP. You need to stop your ongoing SIP. Do it right away. Or some other financial obligation came out abruptly, skip SIP to fulfill that. This flexibility is very crucial characteristic attached to SIP investments. And this makes it very unique to suit everyone’s requirement. For an all-season investment plan to achieve any financial goal, it suits most.
2. Invest any amount, any time and save with discipline, emotionless
You can start investing through SIP with as low as INR 500 in India. Also, you need not have to worry about timing your investments. Means you need not have to worry about bull or bear phase of the market to start savings. This is so because of the averaging concept. This makes you save with discipline over time. Also, you need not have also to control your emotions of losing or benefiting from your ongoing systematic investments.
3. Mutual funds SIP helps to average your cost and compound your returns
Yes, with mutual funds SIP investments you get both averaging and compounding benefits. When the market is in bull phase you pay the higher amount per unit of your mutual fund’s scheme. Similarly, when the market is in bear phase you pay less for every unit you purchase. Thus, you get less number of the unit on your fixed investment in the bull run and higher number in a bear run. This average out your cost and brings down your cost in the longer run.
On the other hand when we save a little regularly every month, the amount compound to a large sum with an additional benefit of income.