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How SIP works in mutual fund investment and its benefits

How SIP works in mutual fund investment and its benefits

Krishna Kumar, an IT software professional just stepped into Gurgaon for his first job. He has plans to go in for higher studies after 3 to 5 years and bear the expenses from his salary. Krishna decided to invest his savings. He has always seen his father investing in fixed deposits and PPF (Public Provident Fund).

But considering high inflation he chose to meet a financial advisor (as PTIC INDIA – Financial Planner in Delhi). After meeting the Advisor, Krishna told him about his future plans.  The advisor understands his needs and suggests him to invest in some of the best performing mutual fund schemes. But Krishna cannot afford a lump sum amount to invest. So the advisor advised him to start investment through SIP (Systematic Investment Plan).

The advisor told him what is the actual concept behind SIP. Krishna got to know that he just has to invest a small amount every month by choosing a good Mutual Fund scheme.

Many new investors in India are looking forward to investment through SIP. It is the best way to enter in the equity markets and take advantage of the compounding returns. To invest their money through SIP, investors can choose the various category of funds. The Mutual Funds like mid-cap funds, small-cap funds, diversified equity funds and balanced funds.

What is SIP?

According to PTIC INDIA – Financial Planner in Delhi, SIP is a systematic way to invest your fixed amount of money in a specified Mutual Fund. It allows you to invest your money at a regular interval (weekly, monthly or quarterly basis). This investment method works similar to the investment in Recurring Deposit, where we deposit a fixed amount of money in a bank. There is no worry about entering the market at the wrong time, wondering if you missed a huge windfall or if the market is on the edge of a downfall.

SIP is a tool that is used by Asset Management Companies (AMCs) all over the world including India as a convenient means by which investments can be made by the investors into equities.

When Krishna asked for the advantages of mutual fund SIP, below are the points the advisor had to say –

Small amount and big gains:

SIPs allow investors to invest small amounts every month. In fact, in ELSS mutual fund schemes you can invest an amount as small as Rs 500 a month.
This is how small saving can lead to higher returns in the long-term.

Rupee Cost Averaging:

Considering a long-term investment approach, rupee cost averaging can even out any market ups and downs in the long term, allowing the investor to gain maximum benefits on his or her investments over time. Investing a fixed amount of money every month towards any investment vehicle allows them to purchase more units or stocks when the price of the investment is lower. This reduces the average cost of purchasing of the financial asset over time.

Power of compounding:

An investor who starts early is the one who is successful. SIP allows one to invest with a minimal amount so anyone starting off early will be highly benefited than the one starting off with a big amount years later than him, since all investment and returns are based on the power of compounding which helps one earn a return over returns.

Investment convenience:

SIP allows the advantage of investing in a small amount of money each time without any hassle to the investor. The investor can send a one-time instruction to know as SIP ECS mandate form to his bank to allow auto debit of the fixed investment amount each month from his bank account without worrying about missing out on any monthly installments.

Tax benefit:

Investment in Mutual Funds either through SIPs or lump sum offers many a tax benefit. For example – dividend received from equity mutual funds are totally tax-free. Long-term capital gains in case of equity funds (investment holding period of more than a year) are also tax-free.
In case of debt funds, the long-term capital gains (investment holding period of more than 3 years) is taxed @20% only after allowing indexation benefit.

How does SIP work:

You start investment through SIP in an equity mutual fund scheme. In SIP a fixed amount deducted from your bank account each month at a fixed date chosen by you. For example, if you decide to invest Rs 5,000 in a mutual fund scheme through SIP, the fund company (as PTIC INDIA – Financial Planner in Delhi) will use the ECS facility to deduct that amount from your bank account at a pre-decided date every month.

For mutual fund investments, SIPs are more beneficial than lump sum investment. You start investing through lump sum in an equity mutual fund when the market is at a high. The market is volatile. If they go down after you’ve made a lump sum investment, you will see major erosion in your invested amount. This will lead to a monetary loss. It might turn you away from equity investing and away from creating wealth over the long-term.

Conclusion:

Krishna is now satisfied that he will be able to do justice to his hard earned money and is looking forward to cherishing his goals in near future.

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