If you are new to investing money in mutual funds, you may think of it as a potentially fruitful or your financial future. However, it may also feel like a puzzle with too many pieces - market trends, endless fund options, and advice coming from every direction. In such a situation, figuring out where to start can be confusing. This is where SIPs or Systematic Investment Plans may offer you a way to make investing simpler. A SIP allows you to invest a specific sum periodically in the chosen mutual funds.
Let’s add another term of passive mutual funds to the mix that represents funds following a market index like the Nifty 50, Sensex, etc., by investing in the same set of stocks that make up the index in the same proportion. These funds simply follow the index instead of trying to beat the market. SIPs in passive funds may create an investment approach that could work for you irrespective of your age. They can let you invest consistently without the stress of timing the market or second-guessing every move.
Let’s explore this combination in detail in this SIP guide
SIPs Made Simple: How Do They Work and Why Do They Matter?
To invest in passive mutual funds, you can start SIPs to simplify things and take one step at a time. You can consider SIP planning as a way to put your investments on autopilot. Here’s how they work:
When you start a SIP, you commit to investing a fixed amount regularly, most commonly daily, every month, quarter, half-yearly, or once a year. This amount is used to purchase units of the chosen mutual fund scheme, whether the market is soaring or dipping. Over time, this approach tends to average the cost of your investments, a concept known as rupee cost averaging. It ensures you buy more units when the NAV (Net Asset Value) is low and fewer units when it is high, effectively balancing out the overall cost of your investments.
SIPs can offer you a structured way to get started without the need for a large initial sum. For instance, many passive mutual funds allow SIPs starting at ₹500 per month, which can make it accessible
How Can SIPs Maximise the Potential of Passive Mutual Funds?
SIPs in passive mutual funds can offer a practical approach to investing that may work for new and seasoned investors. Here’s how:
1. Index-Driven Growth Potential
Passive funds follow an index and aim to offer returns in line with benchmark performance. When you invest through a SIP, you can build your holdings in these funds and aim to benefit from the long-term trajectory of indices.
2. Lower Costs
Passive funds are known for their relatively low expense ratios as they don’t require active management. SIPs can further complement this by allowing you to invest small, manageable amounts to potentially grow wealth without putting strain on your budget. However, you need not rely solely on the expense ratio when making investment decisions.
3. Compounding Power
You can fully utilise the power of compounding with regular investments through SIPs. Over time, even small contributions to passive funds may have the potential to grow in substantial sum.
4. Reduced Emotional Bias
Investing money during volatile market phases can be nerve-wracking. SIPs in passive funds can keep you disciplined and consistent while also providing the reassurance of index-tracking performance. This can minimise the temptation to time the market or panic-sell.
How to Start SIP: A Step-by-Step Approach
You can start investing in SIPs by following the steps given below:
• Set Your Goals
Define what you want to invest for - retirement, a child’s education, wealth creation, etc. Clear goals will help you choose the right passive mutual funds.
● Assess Your Budget
Decide how much you can comfortably invest every month (periodically) without straining your finances.
● Select the Right Fund
Look for a passive mutual fund that aligns with your goals.
● Complete KYC
Ensure your KYC (Know Your Customer) is done, as it’s mandatory for mutual fund investments in India.
● Set Up Auto-Debit
You can link your bank account and authorise an auto-debit instruction for the SIP amount to ensure hassle-free contributions to the chosen mutual fund(s).
● Start Investing
Finalise the SIP details, such as the monthly amount and start date, and you’re good to go!
Key Factors to Consider Before Starting a SIP
Here are some important points to keep in mind before you start a SIP in passive funds:
● Investment Goals
Be clear about your financial objectives, which can be short-term needs, long-term goals, or a mix of both.
● Risk Appetite
Understand how much risk you can comfortably take to assess your tolerance level.
● Time Horizon
Keep in mind how long you plan to invest. SIPs may work for long-term goals by allowing the power of compounding to provide potential turns.
● Expense Ratio
You may compare the expense ratios of different funds to make better decisions, but avoid making investment decisions based on this factor alone.
● Emergency Fund
You can ensure that your SIPs remain unaffected by short-term cash needs by having a financial cushion for emergencies.
As detailed above, SIPs in passive mutual funds tend to offer a smart, fuss-free way to potentially grow your wealth over time.
SIP stands for Systematic Investment Plan, wherein you can regularly invest a fixed amount at periodical intervals and aim for benefits over a period of time through the power of compounding.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
