It is quite true that as we advance towards our old-age, we tend to loose the capability to work. And to plan for the obvious fate, i.e., retirement one needs to plan from an early stage. But, it is often seen that youngsters ignore investments considering it to be early for them to commence one. As they are unaware of the working principles of the mutual fund industry they end up starting late and get fewer returns. It is required to make people aware about behind the scene working of mutual funds.
Systematic Investment Plan is one of the methods used for putting your money in any of the schemes provided by mutual funds. This signifies that SIP is a way to invest and not an investment in itself. By adopting a monthly SIP plan, one can acquire the habit of regular investment which would not only help in accumulating wealth but will facilitate to get the benefit of the bullish and bearish market as well.
Misconception of associating SIP with capital market
The clients believe that a systematic investment plan can be adopted for the stock market also. The clients need to understand that mutual fund and stock investing are two different concepts and cannot be equated with each other. While investing directly in the shares, a client needs to face a lot of restrictions and has the sole liability all the investments. But in mutual fund investing one has a shielded method through which one can not only accumulate wealth but share the responsibility only up to the amount invested. Also, the clients cannot adopt SIP mechanism in the stock market as one does not have the facility to invest Rs. 1000 every month in the shares. There you need to put in an enormous sum at a single time. Hence, it is nothing more than a myth believing that you can have a systematic investment approach for invested in the shares of listed companies.
Key points stating the need of SIP in mutual funds
Investment is a broader term which includes stock market and mutual funds. But, mutual funds have numerous benefits over the direct investment method. And SIP is the most lucrative method of parking your surplus into a scheme which is perfect according to your needs. Following are the reasons which will tempt you to choose this method:
- Rupee Cost Averaging: Each drop is significant to fill the pot. In the same way, each and every penny is valuable in accumulating a huge corpus over the years. If the client regularly invests regularly over a long time spell, then he/she would be able to get an average profit. This by following a consistent investment mechanism the clients will receive the benefit of trending and falling market simultaneously. In some months, the markets may rise providing profit to the mutual fund investors while at other times it would give them reduced profits. By the end these profits get averaged and hence the clients earn handsome returns on the maturity of the plan. Thus, this method of mutual fund investment always motivates the clients to opt for following an on-going investment strategy.
- Power of compounding: As a student excels in his career he keeps on adding to his qualifications. Likewise, when the clients pursue the path of investing in mutual funds consistently then their every investment contains the capability of multiplying itself. But, it is only possible if you commence your investing earlier. A person beginning investment timely can accumulate more wealth in the long run by investing relatively less amount on a regular basis. If a person starts off late and invests more amount monthly, his money will not get the due time to grow. So, he will end up building up a lesser corpus.
Categories of SIP
SIP investment plan in itself a helpful service for the clients to put their money in any of the mutual fund schemes. But, the mutual fund experts have branched investment in SIP into three main branches which can be taken up by an investor accordingly.
- Quarterly Plan: A quarter means time spell of three months. There are four quarters in each financial year. Those clients who are not willing to spare a monthly amount for investing, can benefit from this scheme. So, they get the facility of investing in every quarter, i.e., every three months. Hence, one can easily enjoy the gap.
- Monthly Plan: The client who follow an organized approach in budgeting their revenues and expenditure. They aspire to invest on a regular basis thus monthly SIP will open up the required avenue. the amount of SIP may vary according to the client’s capacity, financial conditions and future requirements.
- Daily Plan: The clients who are very keen to utilize the worth of each penny they earn are the ones being targeted by this scheme. Daily SIP opens up an avenue for the investors who want to plan for their future with a nominal income.