*This is in partnership with BloombergQuint BrandStudio
The adage that little drops make a mighty ocean is one that is expressed across cultures, because it contains an infallible truth. When it comes to wealth, this is an indisputable fact–it is investment discipline that creates wealth.
While the little drops adage applies to savings too, mere savings cannot beat inflation and create wealth. To take an illustration from cricket, a batsman can protect his wicket by playing a defensive game, but he won’t get too many runs on the board. It takes a fine balance of aggression and defence to score and stay at the crease. Similarly, for those who are seeking higher returns than mere savings and understand risk, mutual funds are the best option to consider. Mutual funds ensure that professionally qualified fund managers manage your investment, and even though there is the element of market risk, you don’t have to monitor the market daily and decide what to hold or sell.
And here too the little drops adage still holds true. Considering that market headlines often refer to volatility, investing in mutual funds via a Systematic Investment Plan (SIP) is not just about little drops making a mighty ocean but also about being able to protect against market fluctuations.
Basics of SIP
Known as a goal-based investment, an SIP allows an individual to invest in a mutual fund through a methodical, disciplined manner without having to cut cheques every month or visit a bank branch to transfer funds each time you wish to invest in mutual funds. Under an SIP, a fixed amount, set by you, is deducted from your linked bank account on a date set by you every month, and invested towards the mutual fund/s you have chosen to invest in. The amount could be as low as Rs 500 a month, which once again proves the little drops adage. As you invest over the years, this monthly investment can turn into a significant corpus. Thus, an SIP is a great option for beginners who want to start investing but don’t have the capacity to invest large sums.
Advantages of SIP
Because investing through an SIP leverages the power of averaging, an investor can gain from rupee cost averaging and minimize risks from unpredictable markets. At a point when the markets are low as is the fund’s Net Asset Value (NAV), more units are allocated to your portfolio for your monthly SIP investment. When the NAV of a scheme is high, fewer units are assigned to investors for the same SIP investment. Over a period of time, the cost of your investments averages out. This not only allows investors to gain in the long run as the number of SIP instalments you have made rises over time, you also don’t need to stress about monitoring the markets daily.
An SIP also empowers investors with the power of compounding, which also proves the little drops adage once again. Compounding is a wealth creation mantra that refers to the premium earned on the primary investment amount over time. Hence, the discipline of an SIP works best in the long term. Which is why SIPs are considered ideal for long-term wealth creation such as building a retirement corpus or saving for your child’s education.
That’s where choice comes in. There are various kinds of mutual funds that invest in various kinds of equities and debt and based on your goals you can select a combination of funds to ensure a diversified portfolio. If you believe that companies focused on sustainability and sound environmental practices have a brighter future in an increasingly aware world then you should consider investing in an ESG fund where fund managers evaluate companies based on environmental, social, and governance (ESG) factors and only invest in companies that meet their ESG norms.
Choice also means that you can exit mutual funds whenever you choose (except in the case of funds that have a lock-in period). So, in case of an emergency, you would have access and the ability to liquidate your investments.
How to pick the right SIP
While picking a plan to invest in, investors must keep in mind their objectives, the time they would like to achieve their goal in, and also, assess their risk appetite. Once these factors have been defined, an investor can determine the money required to achieve the target with the help of an SIP calculator which is designed to give an estimate of the wealth one might accumulate over time by investing via an SIP. The calculator takes into consideration your monthly income, expenditure, savings, possible returns on investment, expected inflation rate, and much more to give as accurate a picture as possible.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.