What is a Mutual Fund SIP?
One may not always have a lump sum of money in hand to start an investment for the future. But this must not be a barrier to any willing investor’s financial planning.People often think that any alternative option available to the already existing, popular and conventional investment avenues may not be as good as the original one. But, I’m sure that in the next 5 minutes this prejudice will be done away with.Let's move on to see how the idea and understanding of a mutual fund SIP (systematic investment plan) can help achieve a solid investment plan for small pocket investors or for those investors who want to play safe without exposing themselves to the risk of investment degradation, yet reap lucrative returns.
Systematic investment plan (SIP)
- As the name suggests, a mutual fund SIP allows any willing investor to invest in a mutual fund scheme in small sums of money either on a weekly, monthly or quarterly basis rather than putting in a lump sum of money at one go.
- Systematic Investment Plans are nothing but a disciplined investment into a mutual fund scheme that performs in tandem with the markets just as recurring bank deposits would mean putting in regular and predefined sums of money in a bank's deposit fund.
- In contrast to the fixed amounts of money put into recurring bank deposits at regular intervals, mutual fund SIPs allow investors to invest at regular intervals, any sum of money (above the minimum investment specified in the scheme particulars) they can invest.
- The flexibility of investment(i.e. weekly/ monthly/ quarterly instalments based investment)varies among different schemes of which monthly and quarterly instalment formats are the most popular.
- There are no start and end dates to invest in a SIP.
- And there are no maturity/ redemption dates for investment held in mutual fund SIPs. One may choose to stop putting in money in the fund and just hold the already invested amount until one wishes to and can withdraw the investment whenever one desires.
- Entry and exit load (charges) may vary from one scheme to another. Read more about expense ratio, entry and exit loads.
- There is no penalty charged if one misses investing one or more of such regular & flexible instalments. But it is necessary to understand that any extra amount invested the next time to compensate for the failure to invest the previous time will not let one purchase units retrospectively.
- On every regular instalment invested by an investor, new units are purchased at their respective NAVs (current market value as on the date of investment) and are added up to the previously bought and owned units over the time period.
- Just like a lump sum mutual fund investment, MF SIPs are also market based investments and thus, no return can be guaranteed.
How SIP functions with an example
Let us assume Sarah wants to invest a sum of money and has chosen the mutual fund scheme she wishes to put her money in on 01.01.2018, she may realise that it requires $1,200 to be put in as a lump sum for 10 years to see it grow to $4,854 expecting an average return of 15% for 10 years.On the other hand a mutual fund scheme gives her an option of investing, say $10, (any amount of money above a minimum level as mentioned in the scheme) every month for 10 years to still earn an average return of 15% on her investment for the same scheme.This second option is exactly a systematic investment plan.
So, while an investment in a lump sum model of a mutual fund can lead the investment to grow from $1,200 to $4,854, an investment in a SIP would result in an approximate return of $2,787 provided all instalments are duly made. On the face of it Sarah might think that she is losing out on approx. $2,000 if she goes with a SIP model because in either cases she is investing $1,200 but she should realise that $1,200 split up and invested over a period of 10 years would always mean less than $1,200 invested as a lump sum.
The previous statement follows a simple logic. With $2 can you still buy the same number of candies today as you did in your childhood, 15 or 20 years ago? No. You can't. That’s because the value of money constantly keeps falling over time and thus prices of articles keep rising and so number of articles that can be bought with the same money keeps reducing. Thus, $1,200 as on 01.01.2018 would be a lot more than $1,200 in 120 parts over 10 years.
Read More:
Advantages of investing in Mutual Funds
Direct vs Regular plan of a Mutual Fund scheme
Do I need a demat account to invest in mutual funds?
What are open and close ended mutual fund schemes?
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