A popular investment option for individuals looking to achieve financial goals and grow their wealth, a mutual fund is formed when an asset management company (AMC) pools money to purchase securities.
A fund manager is appointed to manage the investment, and participants are given units corresponding to their investment sum. Purchase and sale of units is at latest net asset value (NAV).
You can begin investing in mutual funds with small sums via systematic investment plan (SIP) or lumpsum, in line with your financial goals. Notably, since MFs are a market linked instrument there are varying levels of risks attached based on the type of scheme. It is advisable to read terms carefully before investing.
What is a Systematic Investment Plan? How do SIPs work?
An SIP allows investors to deduct a fixed sum into your preferred MF scheme each month directly from your bank account and spread out your investment over time. The monthly interval also helps build financial discipline for the long run.
Investing through an SIP means that your purchase units of the MF each time you invest in a fund. The number of units are equivalent to the amount invested. For e.g. for each unit costing ₹10, and investment of ₹500 each months gets you 50 units. This means that the price can fluctuate as per market performance and your units cost most or less during troughs and peaks.
However, the spreading out of your investment over months, more often than not averages your cost of purchase toward the lower side, despite market volatility. This means that you end up paying less on average per unit, when compared to lumpsum investment.
For an SIP, you will have to instruct your bank to allow regular debit towards the selected schemes either monthly or fortnightly; and the number of SIPs (12 or 6 deductions) you choose.
What is lumpsum investment? How is it different from SIP?
Investing through an SIP means that your purchase units of the MF each time you invest in a fund. In lumpsum investment, you put in a full large amount into your preferred MF at the cost at the time of investment.
Here, you lose out on what’s termed as rupee averaging, which gives you benefit of reduction in price for the same units during market downturns.
- For investors looking to supplement their retirement fund
When should you choose lumpsum investment?
- For investors with a large sum ready to invest.
- For experienced investors with confidence of timing markets for highest returns
- For investors comfortable with higher risk for potentially higher returns.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.