A Systematic Investment Plan (SIP) is one of the best methods of saving and investing small amounts of money, automatically every month. Before selecting a mutual fund scheme or multiple schemes, one must decide on how much to save per month, after which, you can apply for starting a SIP either online or via paper work process.
Once your SIP application is approved and starts, Rs 10,000 (for example) will be automatically deducted from your bank account every month and invested in the funds you have selected. You can choose to do this for a minimum period of 6 months and can also stop and withdraw your money anytime you wish to. Your small monthly amounts grow over a period of time to a large lump sum. Also, since your money is automatically deducted every month, you don’t have to worry about manually making monthly transfers.
Rupee Cost Averaging
A SIP also allows you to take advantage of a concept called ‘Rupee cost averaging’, especially in the case of Equity Funds. Let’s say you want to invest in the equity asset class. However, you can’t predict which month the Sensex will be high and which month it will be low. So, instead of trying to predict and time the stock market, you invest a small amount of money every month. If the markets are high, you will get a lesser number of units in your mutual fund account, and if the markets are low, you will get a larger number of units. This way, you are buying when the markets are high and also when the markets are low – over a long period of time the market usually appreciates in value so your average cost of acquiring each unit will be low.
The biggest advantage of an SIP is the habit of regular, disciplined savings. Every month, like other EMIs, this also gets deducted from the bank account through electronic clearing service, which is convenient. Since you will have lesser money in your account, chances are that you will probably spend less too.
Which is the best mutual fund for long term investing ?
Selecting winning funds in advance is more difficult than it looks. Sure, there are always some winners that survive over the years. And if we pore over records of past performance, it is easy to find them. The mutual funds we hear the most about are those that have lit up the skies with their glow of past success. We don’t hear much about those that did well for a while — even for a long while—and then faltered. But easy as it is to identify past winners, there is little evidence that such performance persists in the future. Buying funds based purely on their past performance is one of the stupidest things an investor can do.
The best way to implement long-term investing strategy is indeed simple: buying a fund that holds this market portfolio, and holding it for ever. Such a fund is called an Index Fund. The index fund is a basket portfolio that holds many stocks designed to mimic the overall performance of the financial market. Once you have decided the amount of monthly investment, you can select an index fund that has the lowest expense ratio. Smart investing is all about simplifying investment decisions.
How does SIP work?
■ You first decide how much to save per month e.g. Rs 10,000 per month
■ Select a mutual fund scheme or multiple schemes
■ Apply to start a SIP (either online or via a one-time paper work process)
■ The index fund is a basket portfolio that holds many stocks designed to mimic overall performance of the financial market
The writer is a SEBI registered investment adviser and is a founder of AK Advisory (www.ankurkapur.in http://www.ankurkapur.in/)