Misleading advertising and marketing campaigns are the primary reason that leaves the mass audience confused about the product or service they’re trying to promote. This flaw can be witnessed at its utmost peak when it comes to the investment industry. This is not one-way traffic. Often what happens is that people fail to understand the idea behind a product or service. Sometimes they are lured by the returns that the scheme has earned but do not understand the kind of risks that it takes to earn those returns.
Something similar happens when it comes to mutual funds. Mutual funds are a pool of professionally managed funds. They invest a basket of securities, offer active risk management, and allow retail investors to explore investment opportunities that otherwise might not be available for them. Mutual funds have the potential to generate inflation beating returns in the long run, but investors are taking emotionally driven wrong decisions when they see their portfolio underperforming in the short run. Hence, an individual first must determine their risk appetite, then prioritizes their financial goals, and finally consider a mutual fund scheme that may help them achieve that goal in the stipulated investment time horizon.
To invest in mutual funds investors can either make a onetime lump-sum investment or they can opt for the Systematic Investment Plan (SIP). But wait, isn’t SIP and mutual funds the same thing? Are they different? What is SIP? How is it different than mutual funds? If you too are riddled with such questions, we are here to clear them all for good.
What is SIP?
A mutual fund is an investment product. SIP is the route that an investor can choose to invest in mutual funds.People often confuse SIP to be an investment scheme. A Systematic Investment Plan, abbreviated and often referred to as SIP, is not an investment product as perceived by many. A SIP is a mode of investment and not a scheme in itself.
An investor can either make a one-time lump-sum investment in mutual funds or they can opt for the Systematic Investment Plan. Through SIP, one can makesmall fixed investments at periodic intervals. For example, if you wish to invest Rs 6 Lac in a mutual fund scheme for five years but do not have the resources to make the entire investment at once, or if you are worried about exposing the entire investment sum to market volatility, you can instead opt for SIP. Now via SIP, you can invest Rs 10000 every month and at the end of the investment horizon, you would have not only accumulated Rs 6 Lacs but depending on the scheme’s performance you would have also earned some good interest on your investments.
Why should I invest in mutual funds through SIP?
One of the easiest ways to create long term wealth without feeling a pinch in your pocket is by taking the SIP route. Investing in over the long term in mutual funds via SIP can bring in the power of compounding effect. Also, since you buy units every month at different NAV prices, you have the chance of buying more units and averaging out the cost per unit purchased. Also, SIPs are flexible. Investors can start or stop their SIP investments at any given time. There are no penalties or cancellation charges involved. Investors can even make use of the SIP calculator to find out the total returns that they can earn through their regular SIP investments.
Do remember that SIP is not an investment scheme but a way to invest in mutual funds.