A mutual fund is an investment vehicle for pooling funds from investors who share a common investment objective and carry a similar risk appetite. A mutual fund is known to invest across a diversified portfolio of securities to help investors achieve their life’s short term, mid or long term financial goals. What asset management companies (AMCs) owning mutual funds do is that they collect money from investors sharing a common investment objective and invest this pool of funds across the foreign and Indian economy. Depending on the nature of its scheme and its investment objective, a mutual fund may invest across various money market instruments like commercial papers, company fixed deposits, certificate of deposits, G-sec etc.
Mutual fund investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value). The economic value of the fund’s NAV might vary from time to time depending on the fluctuating markets. It is believed that the performance of a mutual fund scheme directly depends on the performance of its underlying assets and the various sectors and industries in which it invests.
What is SIP and lumpsum investment?
Seasoned mutual fund investors are aware about the fact that you can invest in mutual funds either by making a lump sum investment or you can consider starting a monthly SIP. A lump sum investment is made by the investor right at the beginning of the investment cycle. Investors are allotted units in large quantities, and they prefer entering the market with lump sum investment when the fund is underperforming. This will allow investors to receive more units in their portfolio and when markets become normal, the value of the allotted units might increase.
However, if you wish to inculcate the discipline of regular investing, then you can consider starting a monthly SIP in mutual funds like equity mutual funds or any other mutual fund scheme. A Systematic Investment Plan is a new and convenient way to invest small amounts at periodic intervals in mutual funds. Investors do not need to have a large investment amount to start investing in mutual funds. They can select an amount they are comfortable with an continue investing via SIP till their investment objective is achieved.
Why you should not stop your SIP investment midway?
SIP is known to benefit investors in several ways. If you stop your investments midway, you might not be able to benefit from power of compounding or rupee cost averaging.Compounding in mutual funds refers to the interest earned on the interest earned from the principal investment amount. When the money you invested in a mutual fund scheme earns interest of its own, if you do not redeem the gains and allow them to get reinvested, these gains earn interest of their own. This continuous process of reinvestment is referred to as compounding and might help investors achieve a decent corpus over the long term.
Rupee cost averaging is another investment technique that is known to help investors even in falling markets. When the NAV of a mutual fund scheme is low, more units are allotted. Similarly, when the NAV of the fund is high and since the SIP amount remains stagnant, lesser units are allotted. This adjustment of units depending on the fluctuating NAV is referred to as rupee cost averaging. Rupee cost averaging is known to benefit investors as it spreads the investment risk.
SIP is ideal for anyone who wishes to inculcate the discipline of investing regularly. However, since these are market linked schemes and do not guarantee returns, investors are expected to talk to their financial advisor before investing.