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Your Route to Becoming a Millionaire in Your Early 30s

Updated on April 7, 2016

Why You Should Invest in Mutual Funds Through Systematic Investment Plan

Invest in Mutual Funds

The average assets under management (AUM) of the Indian mutual fund industry grew 13.8 percent in the financial year ending March 2016. It grew by Rs.1.64 lakh crore to Rs.13.53 lakh crore at the end of FY 2015-16, against Rs.11.89 lakh crore at the end of FY 2014-15, says an article published in The Economic Times in April 2016. Mutual funds are considered to be one of the most effective tools for building a significant corpus.

You might invest with the objective of wealth creation, retirement planning or savings for house, children’s marriage and education. It lets you diversify your portfolio and does not expose you directly to market volatility, unlike stock market investments. There are various types of schemes that carry different risk and have a different objective. Therefore, investments in MF can be made by any individual irrespective of his risk appetite. Also, you can start with as little as Rs.1,000 through a systematic investment plan, or SIP plans.

What is SIP and How Does it Work?

A Systematic investment plan is a disciplined approach towards investing in MFs. It lets you contribute towards a scheme at regular intervals (monthly, quarterly, half-yearly and so on). The instalment amount and the frequency of the contributions are fixed in the beginning. To make regular contributions towards a scheme, you can request your bank for an auto-debit. After this, a certain amount would be deducted from your bank account on a fixed date every month. This amount would then be used to buy extra units of the MF scheme you are contributing to, at the NAV prevalent for the day. The same is repeated every month, every quarter or very half-year (as the case may be), says an article by Birla Sun Life Mutual Fund.

Benefits of Investing Through SIP Plans

Wealth creation requires discipline and consistency and best SIP plans offer you both. They streamline your investments and makes it less burdensome. Moreover, they eliminate the need to time the market as you contribute towards a scheme at a pre-fixed date. Also, you do not need to invest a huge sum of money. You can start SIP plan with Rs.1,000. However, that does not mean this scheme is only for small investors. You can stop and start a SIP as when you wish. It is more beneficial to park your surplus money through this channel in volatile instruments such as equity funds, says an article published in Livemint in April 2016.

How Does SIP Investment Help To Create Wealth?

A systematic investment plan basically thrives on the power of compounding and rupee cost averaging. The more number of times you invest, the more number of times money gets compounded. This helps to build a significant corpus over the long run. On the other hand, rupee cost averaging helps you lower the average cost of investment in the long run and eliminates the need to time the market. When the markets are declining, you buy more units at the same price and visa-versa. Financial advisors asked investors to stay invested in their goal oriented investments and SIP plans even when the markets go deeper into the red during early 2016, says an article published in The Economics Times in February 2016. This is because you can reap the best return from a SIP only when you stay invested in the long run.

When Should You Invest?

The earlier you start the better it is. This will help you harness the potential of compounding to its fullest. You can start when you get your first job and make the contributions larger as you become financially stronger overtime. This is called the top-up facility. You must consult your financial advisor to know about how much you should contribute towards this plan and about its tax implications as well.

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