To understand what a SIP means first we have to understand a bit more about mutual funds. So the first part of this article is dedicated toward making the reader understand mutual funds as a mean of investment and in the later part we will discuss about how retail investors can start a SIP, the purpose and need of the same.
“Mutual funds sahi hai” most of us have seen this very popular advertisement either as a television commercial or hoarding while travelling in the city in buses, local trains or metro. This became quite popular as the investor education initiative was taken quite seriously by the concerned body.
Mutual fund basically is a pool of funds collected from a large number of investors which is managed by a professional fund manager. The fund manager is responsible to invest money and generate good returns for all the investors as per his knowledge and industry experience.
In the return of money pooled in the fund the investor is allotted units which represents his portion of holdings in the funds. Any return generated by the fund manager investing the collected pool of funds is distributed evenly between the investors after deducting certain expenses by calculating the Net asset value of the units.
Investing is an art and if not done cautiously or without proper knowledge can be result in losses as it may generate negative return when there is a market crash like we have seen recently in the month of March due to the corona virus pandemic.
Thus it is imperative to understand the nature of investment and put hard earned money according to the risk appetite and financial goals of the individual. We will explain this in the light of various types of mutual funds available to invest in.
Majorly, there are three types of mutual funds an investor can choose from the first one and the most popular of all is the equity or growth fund which invests the money in stocks of the companies listed in the exchange. Now in this category of mutual funds there may be different categories like blue chip fund, mid cap fund, small cap fund and many more which focuses on the type of companies the fund is named at. For example blue chip fund will pre dominantly invest in top companies of the stock exchange by market capitalization.
Multi cap fund will invest in a mix of large, mid cap and small cap companies. Similarly there may be index funds, sector funds, thematic funds, tax saving funds and many more. Cutting the long story short in this case the investment will depend on the market fluctuations to a larger extent and thus suitable for young and aggressive investors who can take some risk on their investment in the search of greater returns.
People who are ready to invest their money for a long time in the market can get high returns then what most other investment options can generate. People who are conservative in their investment like retired persons should not heavily invest on equity funds. Debt or income funds are relatively more secure and less risky investment of the pool funds which majorly invests in fixed income debt securities like of the nature government bond, commercial papers or debentures, bank deposits, treasury bills, commercial papers etc.
In a bull market where the stock indices are breaking record highs day after day Debt funds may give considerable lower return than their equity counterpart but in a bear market where the market is crashing and investors are losing money debt funds are a much safer option and the chances of negative returns are much lesser. These funds may also appear with different names in the market and liquid funds, floating rate, dynamic bond, Gilt funds etc. Hybrid funds invest in both equity and fixed income offering a mix of the above two types. These are the best option for an investor with average risk appetite offering both growth potential and security.
Now there are two ways in which a retail investor can invest in mutual fund, either purchase the units by paying a lump sum amount or keep purchasing units by paying small amounts every month just like easy monthly installments we pay on our home and other loans.
The second way is a more popular disciplined may of investing in a mutual fund and called as systematic investment plan or SIP in short. There is no need for opening a DEMAT account or going through a broker to start a SIP. It can be very easily done directly at the click of a few buttons from the comfort of your home. You should do a bit of research on the type of fund you want to start an SIP in and look at the past returns it has generated over a period of time. This can be easily checked in the fund performance section of many financial websites freely available.
Once being satisfied on these aspects the investor should visit the particular fund website and then by filling a few details and linking their Aadhar number, PAN card and bank account through which the investor wants to get the money debited every month. It will be the same account in which the investor will receive the redemption proceeds.
The investor needs to add the particular mutual fund as biller to the respective bank account for seamless debit of the monthly investment amount.