One of the simplest ways to create long term wealth is by investing in market linked schemes like mutual funds. Mutual funds are market linked schemes that invest in a diversified portfolio of securities and offer active risk management. Some believe that to invest in mutual funds you need to have surplus capital. That is not true anymore, thanks to the option of a Systematic Investment Plan.
A Systematic Investment Plan (SIP) is easy and hassle free way to ensure that an individual saves and invests a fixed sum at periodic intervals in any mutual fund scheme of their choice. Investing in mutual funds via SIP is more convenient than making a lumpsum investment as in the latter style of investing the investor ends up exposing their entire investment sum to market volatility.
Two of the biggest advantages of investing in mutual funds via SIP are the power of compounding and rupee cost averaging.
The power of compounding
You may have heard the term compound interest during your math lectures in school and compounding in mutual funds works in a similar fashion. When you invest in mutual funds via SIP for a longer duration, the returns that keep adding to your initial investment sum start generating interest of their own. This is referred to as compounding. However, to witness the power of compounding investors must not withdraw the capital gains which their investments keep generating from time to time.
Rupee cost averaging
Another great benefit of long term SIP investing is rupee cost averaging. Since the SIP sum that you invest periodically remains stagnant, the allotment of mutual fund units takes place depending on the existing NAV (Net Asset Value). Since the NAV of the mutual fund scheme varies depending on market volatility and how its underlying securities perform, whenever the NAV is low the SIP investment is able to buy more units. Similarly, when the NAV is high, you buy fewer units. Since markets keep fluctuating from time to time, in the long run, investors may end up buying more units at lower NAV, thus reducing the average cost of purchase of units.
How to start a Systematic Investment Plan online?
Investing in mutual funds online is quite simple, thanks to the technological advancements in the investment sector. Investing in mutual funds is now just a few clicks away. Yes, it is that simple. You can start investing in mutual funds via SIP with an amount as low as Rs 500 per month.
To start a SIP in mutual funds, you will need –
- Address proof, PAN(Personal Identification Number) Card, passport size photograph, cheque book.
- It is mandatory for all investors to become KYC compliant if they have to start investing in mutual funds.
Once you become KYC compliant –
- You can start a SIP online by visiting the Asset Management Company’s website and choosing the type of SIP you want to start i.e. weekly, quarterly, monthly, biannually, yearly.
- Since you are a new investor, search for the ‘Register Now’ option.
- Fill in all the basic details like name, age, gender, address, contact number, etc.
- Create an account with a new username and password which you will use every time you buy or sell your mutual fund units.
- Submit your bank details. The SIP transactions will happen through this account. Similarly, whenever you redeem your fund units, the sum equivalent will be transferred to this registered savings account only.
- Select scheme in which you want to start SIP
- Once the fund house affirms your registration, you can start SIP