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Benefits of investing in mutual funds through a SIP

Benefits of investing in mutual funds through a SIP
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SIP (Systematic Investment Plan) can help to fulfill your financial goals with small investments made at regular intervals. These intervals can be chosen by you as per your convenience. You can invest systematically in mutual funds, gold funds via the SIP route.

Here are some benefits of investing in SIPs:

Persistence pays

Any successful investor will tell you that one of the key aspects of investing is to be persistent and dedicated towards the investment. It is easy to start investing with zest and vigor but maintaining the enthusiasm needs focus. A Systematic investment plan allows you to invest small amounts every month/quarter which is easier to maintain as compared to investing a huge amount annually. If you are not persistent with your investment decisions then a SIP can help you achieve your investment goals with ease.

Rupee cost averaging

RCA or Rupee Cost Averaging in arguably one of the best aspect of a SIP. This means that since you are investing a fixed amount every month, you will be able to purchase more stocks/units which the price is lower. This in turn reduces the average cost of purchasing the stock/units over a period of time. If you have a long term investment approach, then RCA helps you to gain maximum benefits on your investments over time.

Example: John invests Rs. 1000 in a mutual fund every month. Let’s look at both the scenarios to see what would be the average price of a unit when the prices are rising and when the prices are falling.

When prices are rising
Month Amount Invested Unit Price No. of Units purchased
January Rs. 1000 Rs. 42 23.81
February Rs. 1000 Rs. 46 21.72
March Rs. 1000 Rs. 46 21.72
April Rs. 1000 Rs. 48 20.83
May Rs. 1000 Rs. 51 19.61
June Rs. 1000 Rs. 54 18.52
  Total: Rs. 6000 Average Cost: 47.83 Total: 126.21

As can be seen above, in a market where prices are rising, John would acquire 126.21 units at an average price of Rs. 47.83 with the current market price already standing at Rs. 54 (current portfolio value=6815.34) and the market showing an upward trend.

 

When prices are falling
Month Amount Invested Unit Price No. of Units purchased
January Rs. 1000 Rs. 54 18.52
February Rs. 1000 Rs. 51 19.61
March Rs. 1000 Rs. 48 20.83
April Rs. 1000 Rs. 46 21.72
May Rs. 1000 Rs. 46 21.72
June Rs. 1000 Rs. 42 23.81
  Total: Rs. 6000 Average Cost: 47.83 Total: 126.21

In a market where the unit price is falling, SIP reduces the losses. As can be seen in the example above, the market value of John’s portfolio in June would be 126.21*Rs. 42=Rs. 5300.82. However, if he would have invested the entire amount (Rs. 6000) in January itself, then the value of the portfolio would have been Rs. 4666.67 (No. of units purchased @ Rs. 54=111.11; Market value of portfolio in June=111.11*Rs. 42=Rs, 4666.67)

Compound Interest

You might have heard this bit of advice from a lot of investment advisors: START EARLY! The reason why this is suggested is to ensure that you benefit from the power of compounding. If you start investing early, then you can earn much higher returns by investing a small amount as compared to someone who starts late but invests a higher amount. SIP allows young professionals to start investing with smaller amounts and benefit from the power of compounding.

Ease of Investment

Another benefit of investing through a systematic investment plan is that you can invest a fixed amount every month without any hassles. All you need to do is set up a one-time instruction to your bank to allow auto-debit of the investment amount from your savings/current account and forget about it.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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