Money can be broadly made in two ways, viz. working hard or making assets work for you. Making money through hard work has been a truism for times immemorial. It is a different matter that depositing the hard-earned money in one's back-pocket or even in a saving scheme may not be such a good idea as passive money offers no scope for appreciation and inflation would actually gnaw into the savings. Given this situation, investment is the only viable option to generate more money. Investments are made for a variety of reasons ranging from beating inflation and achieving financial independence to having a decent retirement life and preparing for a rainy day. And investments come in different flavors, such as stocks, bonds, commodities, mutual funds et al.
Mutual funds are managed by professional fund managers and pool the investors' money into diverse financial instruments such as stocks, bonds, etc. As beginner investors have limited financial resources and lack the wherewithal to pick individuals stocks, they gravitate towards mutual fund investment plans. But the questions remain: Should one jump onto the mutual fund juggernaut, after all? When is a good time to start investing in Mutual Funds? A simple, yet profound Chinese proverb, has the answer, which goes thus, "The best time to plant a tree was 20 years ago. The second best time is now." Having decided that the best time to invest is Now, there are two avenues for investing in mutual funds - park a lump-sum amount or opt for systematic investment plan (SIP). The lump-sum route is a single payment route, while the SIP route allows a fixed amount to be invested at regular intervals.
SIP mutual funds are a buzzword in the investment world today as they allow a person to invest a pre-determined amount in the market at regular intervals. They come in many shapes and across time horizons. Among SIP funds, equity funds invest in equity, debt funds are focused on debt instruments, and hybrid funds' investment portfolios are divided between equity and debt instruments. And SIP funds are available for various time periods such as daily, monthly, quarterly and semi-annually.
"SIPs can be used to invest in any mutual fund scheme. It is an easy and flexible way to invest and an effective tool to create long term wealth. It brings in benefits such as compounding of investments, rupee cost averaging and more importantly, disciplined investment. The key is to start early, invest for longer tenure and diversify adequately across large-cap, mid-cap and small-cap funds in equity and also across various asset classes." Prasanna Pathak, Head - Equity & Fund Manager, Taurus Mutual Fund, emphasized.
SIP Funds: How To Make Money From Systematic Investment Plans
Consult a Professional Advisor
There are about 44 registered fund houses in India (registered with the Association of Mutual Funds in India), together offering a staggering 2,500+ mutual fund schemes, making it obviously difficult for small investors to navigate through such a maze. It is best to seek out professional investment advisors, who know the schemes at hand and can provide buying and selling decisions specific to the investors. After all, choosing the right schemes is half the investment battle won. Good advisors can be chosen on the basis of their past experience, track record and word-of-mouth.
Small is beautiful, affordable and easy to use. Think biscuit and toothpaste sachets in the FMCG space. Akin to FMCGs, SIPs are 'small and smart' financial products for the small investors, a la sachetization of mutual funds. Mutual fund SIPs can be started for as little as Rs 100 a month, depending on factors such as income, risk appetite and financial goals. A smaller monthly investment is easier on the wallet, compared to lump sum investments. And there is immense room to scale up the invested amount thereafter, depending on one's financial situation and portfolio growth.
The market cannot be timed. The best of us often fall prey to chasing market rallies due to fear of missing out on profitable stock transactions. Conversely, panic selling occurs near lows as the investors scurry to salvage something from a sinking ship. Automating the investing process is the best approach to investing as it leaves nothing to chance and emotional frailties. A fixed amount can be auto-debited on a monthly, quarterly, semi-annually or annual basis through ECS (electronic clearance service), thereby allowing the interplay of technology, maths and algorithms to take emotions out of markets.
Harness Magic of Compounding
Compounding is an important principle of the investing world. It works by growing the principal amount, augmenting it with previously accumulated interest and thus ensuring a growth in the entire amount over a period of time. An SIP makes it possible to increase the investment amount by a fixed amount and thus get the benefit of compounding. An SIP investor purchases more units of a mutual fund when the market is down and vice-versa, thereby lowering the average investment cost and averaging out the purchase price.
The mantra, 'slow and steady wins the race', is a critical element of successful investing. Good investing is boring. According to Paul Samuelson, the foremost economist of the 20th century, "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." George Soros, the celebrated hedge fund tycoon, also had a similar take on investing. "If investing is entertaining, if you're having fun, you're probably not making any money," he said.
The bottom line is that SIP is merely a way of investing, especially for a small investor, and getting the right fund is thus of paramount importance.