How exactly must one invest in mutual funds? This question may be lingering on your minds for a long time. We are, of course, talking more in terms of equity funds more than just funds.
Must you opt for lump sum investments or adopt a systematic and phased approach to investing (SIP)? Which works better? Is taking a sip account online worth it? While a lump sum investment grows in a bull market, the actual demand is bullish for short periods, and then it is volatile or goes directionless for long periods. This is when a SIP comes with its benefits of rupee cost averaging.
Here are tips as to how SIP can enhance your wealth in the long run than lump sum investments.
- The earlier you begin your SIP, the smarter you are: The earlier you start, the more your principal will begin to earn returns, and therefore more will be the returns that you receive. It is called the power of compounding. Interestingly, it takes about a time frame to make the most significant difference in your wealth, which is more than just the rate of return and the quantum of investment. The moral of the story is that even if you start small, start early!
Also Read SIP Vs Recurring Deposit Which Is Best?
- Discipline and loyalty are what matters a lot: Once you start a sip account online, ensure that you continue to pay and not miss on the SIP contributions. There are two main aspects in this argument; one is to ensure that you pay SIP as a discipline and treat other expenses as residual. Unless you can maintain that discipline, you will not be able to make the best of the SIP. If you stop any SIP in between, your eventual wealth creation does get impacted. Secondly, if you plan to invest in a SIP for reinvestment of principal and expect returns, then you must prefer a growth plan over a dividend plan. If you opt for a dividend plan, you can use the dividend money that can impact your final wealth creation.
- Say NO! to thematic fund SIP and say YES! to diversified equity funds: Investors generally get confused as to which fund to invest when it comes to SIP. You may get tempted to opt for a higher risk sector fund or a thematic fund to enhance returns. That is because; it can go against diversification, which is the theme of mutual fund investing. You can invest in mutual funds to diversify your risk, make sure you opt for the sector or a thematic fund if you are going against essential diversification. It is always advisable to spread your risk, and that can be achieved only through diversified equity funds.
- SIPs must be in lieu of your long term goals: To make your SIP matter, make sure to tag each SIP to your long term goal. You may have short term SIPs on liquid funds, medium-term SIPS on debt funds, and long term SIPs on balanced funds or equity diversified funds. The nature of the SIP can be structured as per time frame and mission criticality, and this cannot be achieved generally via lump sum investments.
SIP can be a great instrument for long term investments. If you compare SIPs with lump sum investments, they may score high on two major counts. Firstly, SIPs even out the market volatility. Secondly, SIPs can be tagged to your corresponding goals! Understand the relation between the amount invested, the time spent, and the rate of return earned. Begin your investing journey with sip account creation at Tradeplus, one of the largest Discount Brokerage firms in India