Mutual funds are one of the most favoured investment options as it allows an investor to invest in stocks and get an average return over a period of time if the investor has chosen the systematic investment plan (SIP) route.
Mutual Fund SIP
A SIP is often an effective method for reducing market volatility. Through the ups and downs of market cycles, it helps you average out your investment costs. Every extra payment lowers your average cost and allows you to sell more units at the same price in a down market. This might have a significant impact on how things turn out.
As per the data from the Association of Mutual Funds in India (AMFI) for the month of June 2023, investors continue to flock towards the SIP route for making investments as inflow through the category was at ₹14,734 crore.
Livemint spoke to Vinit Khandare, CEO & Founder, MyFundBazaar about the hidden facts about SIPs, and how they can impact investors’ return.
Four little-known hidden facts about SIPs
1)Slow start can be a good start
Your investment discipline may be put to the test during the early stages of a SIP. In this stage, the market’s behavior is not as important to the investment outcome as your behavior in reaction to its whims will be. There can be instances when the market will trend downward or sideways due to the volatility of stocks.
2)Beyond a certain size, SIPs are not agile
A SIP is often an effective method. It assists in averaging out your investment costs over market cycles’ ups and downs. Every extra investment lowers your average cost and allows you to sell more units for the same money in a market.
3)SIPs recover faster from bear markets
A SIP handles the majority of the labour-intensive tasks in a declining market. During this period, the rupee cost-averaging mechanism is in effect, bringing in additional units at a cheaper cost. This positions you for better results when the market tides flip. The SIP investor recovers from a bad market considerably more quickly because of this approach. If you stick with the SIP through a protracted bear market, the market rebound that follows will increase your SIP value considerably more quickly.
4)Real compounding happens in the last phase
Future returns will be higher as the invested amount increases over time and returns are reinvested. However, to witness this compounding in action, time is essential. SIPs may not yield significant returns in the first few years, but as time goes on and you keep your investment in place, compounding takes place.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 02 Aug 2023, 02:52 PM IST