Over the years we have observed that to save more and expend less is the typical household behavior. The logic is pretty simple; you need to build an emergency fund, which you can utilize in days of financial crisis. The ‘saved amount’ can also be used to fund higher education, or for your ward’s marriage or any other activity that demands a good amount of money. Earlier, a majority of the families used to keep this ‘fund’ as cash in their homes. However, thanks to a slight increase in financial awareness and financial literacy levels, people started trusting banks and opened their bank accounts.
However, this logic and this habit of ‘saving’ seem to annoy economists. They argue that amount saved or less spent is harmful to the economy in the short term. Since this amount doesn’t go back to the economy; it results in decreasing the amount of money in circulation. This decrease in money supply can lead to a recession.
However, if this amount saved is invested, it can not only boost your income levels but also can help economy accelerate in its growth trajectory. Hence, it is advised that one should invest either directly or through mutual funds.
Why invest in mutual funds?
Here’s typical cycle of your money: You earn a certain amount of money. You expend a part of it and save the rest. The saved money in most of the cases is idle money. It doesn’t go back to the economy (in short-term period). However, if you invest a part of your saved amount, it not only enhances your income but also helps you to achieve financial freedom.
If you invest, your cycle of money looks something like this:
Hence, your money multiplies if you invest. Here are few reasons why you should start investing:
- All the mutual fund schemes are managed by professionals. These fund managers (professionals who manage that specific fund scheme) keep track of the markets, which are the best stocks to bet on when to buy and sell them. Hence, most of the research job is already done by these fund managers. All you have to do is look for a fund that suits your goal requirements and risk capability. For that, a good financial advisor can help you out.
- One of the most important reasons to prefer mutual funds investing is that they generate higher returns when compared to Fixed Deposits or PPF. Fund managers make sure that you earn enough keeping inflation in mind.
- Investment through Mutual funds is perhaps one of the most disciplined approaches one can have for investing. Your SIP amount will be debited on the same date of every month. The amount invested is also same unless and until you choose to top up or pause your SIP. The habit of investing not only instills the habit of saving in you but also checks your unnecessary expenditure.
- ‘Don’t put all your eggs in one basket’ they say. Mutual fund investing is a classic example of this. Through the mutual fund, you don’t invest in just one type of asset class or stock. You invest across most of the asset classes and stocks, thereby diversifying the risk. Fluctuation in any one of the stocks will be compensated or balanced out by others.
Apart from above benefits, perhaps one of the reasons that it is one of the most popular options for investing is because its convenient. Thanks to the advent of digital age, you can now invest online. Further, you can also rename your portfolio as per your goal.
What is SIP?
SIP or Systematic Investment Plans allows you to invest a fixed amount regularly in a mutual fund scheme, be it debt, equity or hybrid. Your SIP amount gets automatically debited from your account. It does not only offers convenience but also enables you to save more. Systematic Investment Plans work on this principle of saving and investing regularly. If you have been investing through SIPs, you might have noted that your wealth has grown exponentially through the small amount that you invest regularly.
Benefits of SIP
Investment through Systematic Investment Plan is not only convenient but it also makes sure that investor does not have to face the adverse effects of risk. It will be clear from the following points:
- One of the popular misconceptions is that you should sell all your units when the market is low and buy when the market is doing well. Actually, you should do the opposite! The effects of market ups and downs is diminished to an extent because of rupee cost averaging. If the prices are low, Net Asset Value will be low, hence you can buy more units. However, if the NAV is high, you’ll buy fewer units in the same amount.
- The best part of investing through Systematic Investment Plans (SIPs) is that you don’t have to allocate too much amount for your investment or at least in one specific fund. You can invest as low as Rs. 500.
- Your wealth will grow exponentially over the years if you invest continuously. Reason? Power of compounding! For example; if you invest Rs. 15000 monthly for 15 years at the rate of 15%,, then at the end of investment tenure, total value will be Rs. 100 lakhs. However, if you continue to invest for 15 more years, the total value will be Rs. 1038.49 lakhs. Hence, it is recommended to invest for a longer period of time.
Right way to invest through SIP
All things said and done, but are they done correctly? According to experts, wealth is best managed and grown when attached with a specific goal. So, if you need funds for your retirement, your financial planner can advise you how much you have to start allocating and in which set of funds. One thing to note here is, you should not have a common portfolio for all your goals. For each goal, make a separate portfolio. This way you can manage your portfolio easily, and the fund allocation will be done as per the demands of the goal/ goal cost.
Types of SIP
The popularity of SIP has grown. Hence there are now options available which you can avail to customize your SIP as per your needs and convenience.
Top Up SIP
With Top Up or Step Up SIP, you can choose to increase the investment amount at regular fixed intervals. This is really helpful in case of goal planning. So, if you have received the bonus or any other windfall gain, you can choose to increase the investment amount. SIP Top up frequency is at half yearly and yearly basis.
With Pause facility, you can pause your existing SIP for a temporary period. You can pause your SIP without discontinuing it. The SIP will restart from the immediate month after the completion of Pause period.
Avail Insurance along with SIP
Mutual Fund houses now provide free insurance cover to investors who invest via SIPs. As per the fund houses, here how the life insurance cover will work for you:
- Decide on the Sip amount. (Minimum Rs. 1000).
- The tenure of the SIP should be at least three years in order to avail insurance. Also, it is available for selected schemes.
- Life cover will be the specific multiple of the installment amount- 10 times the installment amount in the first years, 50 times in the second year and at least 100 times in the third year.
Individual investors held Rs.12.07 lakh crore in mutual funds as of April 2018, an increase of 35.8% over April 2017. This shows that mutual funds have not failed to attract individual investors to invest. The main reason for the sudden rise in investors as well as the investment amount is that these funds offer better returns that FD or PPF. Further, rupee cost averaging insures you against sudden ups and downs. Further, the add-on features like insurance SIP, allows you to avail insurance for free without any costs. If you haven’t started investing, invest NOW!!!