Have you invested in an RD account? or a gold bond? Most of these kinds of investments mean investing a small amount in a frequency for a period of time and then taking home the lump sum. We have always been able to do that in the case of recurring deposits, post office schemes, or even gold bonds. But, for a very long time, it was never possible to do that with the stock market or any aspect of the stock market. When we invested in shares or funds, we had to have a lump sum to invest in it.
The tables have turned now; thanks to mutual fund houses and asset management companies, we have a broader range of choices – through SIPs that work in a similar way.
Why Invest in SIPs?
It is not possible for all of us to invest big sums of money in one go. This is because the majority of the people are employees or salaried persons; even the start-up fever is one the move when we take into account statistics, we will know that the majority is still salaried people.
This means we don’t get one shot at big payments, but we get a salary every month. When it is a salary every month, a part of it will go towards the cost of living, essentials, and debts, and only some of it would go towards some or investing.
This is why it is not practically possible for them to buy a stock that costs so much in one go. This is where the SIP can come to play and help. The SIP will start off as a minimum of Rs. 500, and it is a small contribution every month or quarter, which a lot of people will be okay or can afford to make.
In order to understand this, you will first have to understand how a SIP works.
How Does a SIP Work?
You know that mutual fund houses buy stocks by putting small contributions of the public together. That is how people can afford to be invested in the stock market when they cannot afford to be invested in actual full stocks (let’s not think about fractional shares right now).
Mutual funds are mainly of two major types – that is full payments and SIPs. Full, one-time payment of a mutual fund is where you can buy the fund in one shot. The other one is where you can choose to invest in a SIP, with small payments every month.
Let’s look at this through an example.
You have chosen to invest in DHFL.
There are two ways you can do it:
- a) One-time payment
- b) SIP (Systematic Investment Plan)
Now, in the mutual fund houses portals and apps, you can see online calculators. It will enable the DHFL SIP Mutual fund Calculation Online to choose between SIP or a one-time payment.
Factors That you Will Have to Consider Before you Invest in a SIP
Here are a few parameters that you would have to look at when you invest in SIPs, and they are:
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The costs
This is one of the most critical attributes that you will have to consider. You know the mutual fund house or the asset management company will charge a little something in order to manage your portfolio and your account. You need to make sure that these charges are not too high and that you can afford them.
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Investment Objective
Before you start to invest in a mutual fund – you need to make sure that you know what the investment objective of the mutual is. Each mutual fund would have a different investment objective. The investment objective of a mutual fund will tell you how far the fund is going to benefit you and much you can earn through it.
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Asset Diversification
The mutual fund that you are going to invest in needs to be part of the diversification of assets, and it should not be another investment in the same basket. This is where you cannot put all of your eggs into one basket; you need to spread your investments across various investment instruments to lower the risk factor on you.
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The AMC
You need to rely on the asset management company that will give you the best mutual funds, and you will also have to do your part in the research of the fund managers who are managing the mutual fund. The asset management company needs to be one that has a good reputation, and the fund manager needs to be someone who has a good work history and also some well-performed stocks in the past.
Conclusion
Investing in a SIP means it is a much lesser risk when compared to the other tools of the stock market or even the mutual fund house, and if you are someone with a low-risk appetite, this is something you can conveniently invest in. You would not have to worry a lot about the risks involved, and you be assured that your returns would be yours to keep.
