There are a lot of investors who are now beginning to realize the importance of investing in mutual funds. In the recent past, mutual funds have offered far better capital appreciation as compared to ULIPs as well as traditional investment schemes like bank FDs and Public Provident Fund. Also, one can invest in mutual funds in a far more flexible way than conseravative schemes. The problem with conservative schemes is that they offer low interest rates. Secondly, they come with a predetermined lock in period that may range anywhere between 5 to 15 years (sometimes even more). Also, in case of an exigency it is easier to liquidate your mutual fund investments. If you try to stop investing in a conservative scheme midway, you may have to pay a fine and it will also affect the corpus you were going to receive at the end of your investment journey.
A Mutual Fund is a pool of professionally managed funds where the fund manager buys / sells securities through an applied investment strategy in such a way that the common investment objective is achieved. Market regular SEBI (Securities and Exchange Board of India) describe mutual funds as – “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.”
What an Asset Management Company does is that it collects money from investors sharing a common investment objective and invests this pool of funds across various money market instruments and asset classes. Depending on the nature of the scheme and its investment objective, a mutual fund may invest across company stocks, gold, debt instruments like commercial papers, company fixed deposits etc. It is believed that the performance of a mutual fund scheme depends on the performance of its underlying assets and the various sectors and industries in which it invests.
What is SIP and lump sum investing in mutual funds? Which one is better?
Earlier, when mutual funds were launched in India, only the elite could afford to invest in these market linked schemes. That’s because one could only invest in a mutual fund scheme by making a one time lump sum investment which was by far unaffordable by many. But thanks to the introduction of SIP, it has now become possible for almost everyone to invest in mutual funds and seek capital appreciation over the long term.
A Systematic Investment Plan (SIP) is a unique way of investing small fixed amounts towards a mutual fund scheme of your choice. The biggest difference between SIP and lump sum investing is that one does not need to have a large surplus as initial investment. All an investor has to do is decide how much they want to invest every month and inform their bank to allow auto debit. After this, every month on a fixed date a predetermined amount is debited from the investor’s savings account and electronically transferred to the mutual fund scheme.
There are several other benefits which SIP hold over lump sum investing. When you start a monthly SIP, only the amount that you invest every month is exposed to market’s volatile nature unlike lump sum investing where the entire investment amount is exposed to market’s volatile nature. Also, those who continue investing in mutual fund schemes via SIP for the long run, they stand a chance of witnessing their small monthly investment amounts multiply into a large corpus, thanks to the power of compounding.
If you wish to achieve your life’s long term financial goals, you can start investing in mutual funds via SIP. But it is better to keep a long term investment horizon to make sure the scheme that you invested in is able to perform to its fullest potential.