If you make smart investment choices, your money may increase in value and outpace inflation. For this to happen, an investor must use the potential of compounding and trade-off between risk and return.

Learn with ETMarkets: What is a SIP? How to Invest in Mutual Funds via SIP?iStock
Investment has been an essential tool to prepare oneself for potential emergencies, inflation, and other external circumstances. However, the main use case for it has been building wealth.

If you make smart investment choices, your money may increase in value and outpace inflation. For this to happen, an investor must use the potential of compounding and trade-off between risk and return.

The market we are in has a myriad of opportunities and options for investors to strengthen their portfolios. Mutual funds are one such financial instrument that has gained significance over the years.

There are various ways for an investor to invest in mutual funds; however, SIPs, or systematic investment plans, have gained popularity. But what is SIP exactly, and how can you benefit from it? Let us delve deep into the meaning of the term.

SIP: systemize your investment
SIP is an investment option in which an investor’s money is invested in a mutual fund over time at pre-determined intervals (such as months or quarters). This method can help you build wealth via regular investment by providing compounding results regardless of the size of the investment amount.

This is accomplished electronically through a platform like the NSE or BSE or with an intermediary DP (depository participant) such as a broker.

How it works: When you make a SIP investment in a mutual fund scheme, you buy a specific number of fund units equal to your investment amount. When investing through a SIP, you can profit from both bullish and bearish market trends, eliminating the need to time the markets.

You buy more fund units when the markets are down and fewer fund units when the markets are up. Since all mutual funds’ NAVs (net asset values) are updated every day, the price of purchase may change from one SIP installment to the next.

The cost of purchases eventually averages out and ends up being on the lower end, which is known as rupee cost averaging.

SIP is a tried-and-true method that tends to reduce the investor’s risk of losses and enables buying mutual funds (MF) at lower prices by making regular investments.

When you put a set amount into a mutual fund on a regular basis, you automatically profit from market volatility without having to worry about market timing. Now, the main question that persists is: how do I invest in mutual funds with a SIP?

Know thyself and set your goals
We must be aware of our financial objectives before learning how to invest via SIP. The long-term financial objectives that you hope to accomplish with your money can be referred to as your investment goals.

This could involve saving for a big purchase like a house or car, investing for retirement, creating an emergency fund, or all of the above.

Next, depending on the type of investment, you must choose your amount (as low as Rs. 100) and also your investment horizon, which can range from months to years.

The purpose of SIP investments is to guarantee that your portfolio has the necessary risk profile that you have agreed to, along with good asset class diversification.

If you really want to get the most return on your investments, diversification is essential. With SIP, which is a straightforward and adaptable investment strategy, asset diversification is made simpler.

Start building wealth
A Demat account with a broker is a prerequisite to starting a SIP. Investors must finish the KYC documentation process before they can begin investing with mutual fund houses.

For this, you must provide documentation of your identity, address, and photo. After your account has been opened and your KYC has been approved, it is time to select the right plan for your SIP.

Getting a positive return on your investment won’t be simple if you don’t choose the right plan. Every plan is unique and will have extra features, conditions, and advantages.

For selecting the right mutual fund, you must focus on your risk appetite, frequency of investment, and number of units. Additionally, it is a good idea to think about buying categories that are not too volatile and have produced good results.

Also, these investment categories must focus on businesses with greater long-term upside potential and have historically produced impressive CAGRs over the previous ten years.

Today, there are several platforms that provide online calculators to calculate your results. Therefore, you must always analyse, research, and only then invest, as investments in mutual funds are subject to market risks.

All things considered

SIP is a proven and simple way to invest in mutual funds. With this method, the investor’s entire wealth-creation process is simplified by this investment strategy, which helps ensure discipline and routine investments in the best mutual funds.

However, every investor needs to be aware that there are a number of variables, such as market conditions, investment strategy, and the type of investments made, that can affect the rate of return on investment. In order to reach the desired corpus, investors may also want to think about increasing their monthly SIP contribution by 10% annually.

Furthermore, any investment can be successful in the markets if it starts early and is planned for the long term.

Therefore, it is advised that before making an investment decision, investors thoroughly investigate and evaluate various investment options, as well as consult with a financial advisor.

(The author is the Executive Director of Findoc)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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