For long-term wealth creation in India, investing in mutual funds through SIPs (Systematic Investment Plans) has become one of the most common and successful strategies. SIPs enable investors to systematically accumulate wealth by allowing them to invest a specified amount in mutual funds of their choice at frequent intervals, usually every month.
This consistent approach leverages the power of compounding and rupee cost averaging, ensuring that even small, regular contributions can add up significantly over time. As a result, SIPs have become the preferred investment choice for anyone who wants to build wealth gradually and without taking excessive risk.
SIP investing has the advantage of offering rupee cost averaging and the possibility of higher returns compared to traditional investment options like fixed deposits. With so many SIP plans available in 2024, it will be a challenge for investors to choose the best one for their specific requirements. Hence, it is extremely important to understand the salient features and benefits of the several SIP plans in the market.
Using SIP to grow mutual fund portfolio
Match your financial goals with the mutual fund: Each person in each age group has unique financial needs, resulting in different financial goals. Hence, it is preferable to match your mutual fund SIP with your investment plan based on both short-term and long-term financial goals. For example, when you are investing for a long-term goal like your retirement corpus, it is advisable to use SIPs that include unit mutual funds.
Avoid the hustle and bustle: As markets tend to be quite intense and volatile, it is normal for net asset values (NAVs) to fluctuate regularly. That being said, when markets fall, there is no reason to panic and sell mutual funds. You can reap the benefits of rupee cost averaging if you keep investing for 1–3 years for short and medium term goals and more than five years for long term ambitions.
Focus on long-term goals: A minimum three-year investment in a particular mutual fund is recommended for those making SIP investments with medium- or long-term goals such as retirement planning or financing a child’s education. One can see that returns generally increase in the third or fifth year by looking at the performance of mutual funds over one year, three years and five years. The compounding effect, which increases growth over time, is responsible for increasing returns. Thus, to optimize returns on SIP investments, patience and a long-term perspective are essential.
Advantages of SIP investing
Mixing power: Compounding in the context of mutual fund investing is the interest or profit on your investment earnings. Investments made regularly have the long-term benefit of compound interest, which helps the investment grow and yield respectable returns. Your mutual fund gets a monthly investment when you initiate a SIP. Depending on the amount invested and the current net asset value of the fund, investors acquire shares in the form of shares. If the NAV is high, fewer units are allotted. Similarly, mutual fund investors get more shares when NAV is low.
Rupee Cost Averaging: When an investor makes successive investments of a fixed amount at predetermined times, rupee cost averaging is achieved. Thus, in times of low prices and significant price volatility, the investor will purchase more shares of the investment. By averaging your unit costs, the rupee cost averaging effect reduces the impact of transitory market fluctuations on your assets.
Easy Investing: An important step in building wealth is making sound investments. Another advantage of SIP is that it regulates your investment. You can also create ECS in your bank accounts and arrange a fixed deposit amount to be sent to the SIP funds every month. It’s easy to automate your assets; otherwise, given the pressures of everyday life, most people tend to forget about them.
Using SIP in 2024!
Offering the benefits of both compounding and rupee cost averaging, SIPs provide a great base for tracking wealth over time in India. In 2024, with a big change expected in the investment environment and many investment opportunities, people should adopt an organized way to invest in mutual funds to gradually achieve various financial goals
Nitin Shahi, Findoc CEO
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