Advantages of Using SIP To Invest In Mutual Funds

A Systematic Investment Plan (SIP) is a simple way to invest in mutual funds by investing a fixed amount at regular intervals. It helps you build a regular saving habit without needing a large amount of money to start.

Let’s explore the various advantages of investing in MFs via SIP.

A Low Investment Amount

Many mutual fund SIPs allow you to start investing with a small amount, sometimes ₹500 per month or less, depending on the scheme and fund house. The minimum amount for ETFs and fixed deposits varies by product and provider.

You can invest in a SIP even with a low income to save for future goals, making it an accessible mutual fund investment plan for youngsters who have recently started earning.

Power of Compounding

In a mutual fund's growth option, the income and gains earned by the fund remain invested in the scheme rather than being paid out to investors. This can help your investment grow over time, although returns are not guaranteed and mutual funds do not have a fixed maturity date unless the scheme specifies one.

Reinvesting returns can create a compounding effect over time, but the final returns depend on market performance, expenses, and the length of the investment. However, compounding does not guarantee maximum returns.

Build Discipline

With a SIP, you can build your investment discipline by automatically investing a fixed amount each month. You can set up a SIP by choosing a mutual fund scheme, an investment amount, and a payment frequency. You can also set up an automatic bank debit to make regular investments easier. However, you should review your investments from time to time.

Flexibility

Missing a SIP installment generally does not result in a penalty from the mutual fund, but repeated missed payments may lead to the SIP being cancelled. Your bank may also charge a fee if an automatic debit fails due to insufficient funds, depending on its rules.

You can generally pause or cancel a SIP and restart it later, subject to the fund house's rules. Before stopping it, check your financial needs and remember that stopping a SIP does not automatically sell the mutual fund units you already own.

No Need to Time the Market

You can start investing through SIP at any time, regardless of the market situation. With a fixed SIP amount, you generally buy more mutual fund units when the unit price (NAV) is lower and fewer units when it is higher. This is called rupee cost averaging, but it does not guarantee profits or protect you from losses.

Adjust SIP Amount When Required

You may be able to increase or decrease your SIP amount, depending on the options offered by the fund house. In some cases, you may need to modify your existing SIP or register a new one to change the amount.

Step-up Or Start Investing in A New SIP

Other than adjusting the investment amount in your existing SIP account, you can also start investing in a new one. For instance, you may have received a salary increment and want to save a part of it. If your income increases, you can consider increasing your existing SIP through a step-up facility, if available, or starting another SIP in a suitable mutual fund scheme. You must choose a fund based on your financial goals and risk tolerance rather than simply looking for the best-performing fund.

Reduced Average Cost

With SIPs, you can purchase mutual fund units at different prices over time, as this allows you to invest across market cycles. The mutual fund's Net Asset Value (NAV) fluctuates with changes in the value of its underlying investments. When you invest through a SIP, you buy mutual fund units at different prices over time. This may help lower your average purchase cost in certain market conditions, but it does not guarantee a lower cost or better returns than a lump-sum investment.

Prevents Emotional Investing

When investing in the stock market, it is crucial to set emotions aside. Markets experience frequent ups and downs due to volatility. Some investors who chase peak prices out of greed often suffer when the market suddenly drops. A SIP helps counter this by automating regular investments rather than relying on short-term market timing.

FAQs

What is a SIP in mutual funds?

A SIP lets you invest a fixed amount in a mutual fund at regular intervals, such as monthly or quarterly.

What is the minimum amount required to start a SIP?

The minimum amount depends on the mutual fund scheme. Some fund houses allow SIP amounts as low as ₹500 per month or even less.

Can I stop or pause my SIP anytime?

Yes, you can generally pause or cancel a SIP, subject to the fund house's rules.

Does a SIP guarantee returns?

No, SIPs do not guarantee returns or protect you from market losses. Your returns depend on the performance of the mutual fund you choose.