There is growing awareness about the benefits of investing in mutual funds. With a number of investment avenues, it has become possible for investors to park their funds into a diversified portfolio for high returns.
Investing in a mutual fund has balanced risks due to the diversification and carries a benefit of compounding of interest. The fund is managed by fund managers who strive to increase the return on the investment. The biggest advantage of investing in a mutual fund is the flexibility of setting up a Systematic Investment Plan (SIP).
An SIP is a small step towards building a large corpus. The small but sure steps ensure that investors regularly invest a predetermined amount into the fund and allow it to grow. With long-term investment into a mutual fund, the returns will be significantly higher.
What are the benefits of SIP?
Starting an SIP is a simple and hassle-free process. Listed below are five benefits why every investor should opt for it.
- It brings financial discipline in the life of the investor.
- Through the advantage of Rupee Cost Averaging the total cost of the portfolio is brought down.
- Since SIP doesn’t require any rigorous planning, it is therefore easy to manage.
- Interest is earned not only on the principal amount but also on the interest generated through the benefit of the power of compounding.
- It helps investors reach their financial goals with ease.
Let us understand the above mentioned points in detail:
SIPs bring financial discipline to the life of an investor. Every investor is able to save a particular amount from their income and invest it into the funds each month. This ensures that there is no default in the investment and the investor plans his expenses keeping the SIP amount in mind. Sometimes investors start and suddenly stop it when they end up using the funds to cover an expense. SIP ensures that this does not happen as the money is directly debited from the investor’s bank account and hence there is a regular and systematic investment each month. Investors can learn how to invest in SIP online and manage the same with ease. With each passing year, the amount of SIP can be increased in order to meet the financial goals.
Advantage of Rupee Cost Averaging
Due to the impact of the market fluctuations, the Net Asset Value (NAV) of the fund will keep changing. Investors can put a small amount on a regular basis and buy more units due to lower NAV in case the market is low. If the market is high, investors can purchase fewer units on their investment. The total average cost of the investment eventually comes down in case of an SIP as compared to that of a lump sum. Every purchase is made at a different NAV, which brings downs the total cost of the portfolio.
Easy to manage
SIPs are easy to manage since they do not need planning. Investors are not required to time their entry into the market and research the funds. It is easy to buy mutual fund SIP online and manage the same. The fund managers will try to generate higher returns on the investment by investing the sum into various schemes. The investor does not need to track the portfolio every single day to learn about the performance of the fund.
Benefit of the power of compounding
Mutual funds enjoy the benefit of compounding of interest, which means investors earn interest not only on the principal amount but also on the interest generated on the same. This allows the investors to earn higher returns in the long run. Due to the benefit of compounding, mutual funds are preferred as an investment option as compared to any other assets present in the market. The longer the tenure, the higher the returns on the investment.
Reach financial goals with ease
An SIP is lighter on the pocket and enables investors to achieve the long-term financial goals in a stress-free manner. Investors can set up different funds for different goals and work systematically to achieve the same. Over a long period, the corpus will significantly grow.
The first step towards starting an SIP is setting up realistic financial goals. Based on the goals, the amount of investment and the tenure for the same should be determined. Investors can then set up the SIP based on the monthly investment they need in order to achieve their goals. The timely investment will ensure that the fund grows significantly and the amount is maximized. Investors can learn how to invest in SIP and choose the fund based on the past performance and their goals. There are specific funds that help in tax saving as well. Investors can seek advice from fund managers or research the fund themselves and make an investment decision.
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