Understanding your financial goals is important and one can do that by starting with financial planning. To those who aren’t aware financial planning is a simple way to determine your short term and long term financial goals and then crafting an investment strategy to target them. These days investors are complaining that conventional investment avenues are offering unacceptable interest rates. Over the past few years interest rates have dramatically declined with banks offering interest rates as low as 4-5 percent.

As such low rate of returns isn’t going to help anyone with their financial goals, investors are now moving to other investment avenues like mutual funds.

What is a mutual fund?

A mutual fund is an investment vehicle for pooling financial resources from investors sharing a common investment objective and investing the sum accumulated across the economy and financial instruments. The fund manager may choose to withhold the some of the corpus and depending on market movement invest. The performance of a mutual fund scheme depends on the performance of its underlying assets as well as all the sectors and industries in which it invests. Mutual funds offer active risk management and invest in a diversified portfolio of securities to mitigate investment risk.

Potential investors must know that there are multiple ways to invest in mutual fund schemes. Earlier the only way to invest in mutual funds is by making a onetime lumpsum investment. This way of investing was not favored by everyone as not everyone had the resources to make bulk investments in mutual funds. But ever since SIP was introduced, it has become the favorite investment option of most investors.

What is SIP?

Today, the word SIP and mutual funds have become so synonymous that people often confuse them to be one and the same thing. A Systematic Investment Plan is a simple and convenient way of investing in mutual funds. They are not mutual fund schemes as misinterpreted by many. A Systematic Investment Plan allows mutual fund investors to invest small fixed sums at regular intervals in any mutual fund scheme. It is a simple process to ensure that new investors inculcate the discipline of investing on a regular basis.

The automatic SIP transaction is even simpler as all the investor has to do is give their consent and request their bank to allow auto-debit. After this, every month on a fixed date the predetermined SIP sum is debited from the investor’s savings account and they receive units in quantum with the fund’s current NAV (net asset value). For example, if the investor invests Rs. 10,000 via SIP and the mutual fund NAV stands at 32, investors will receive 312.5 units. The value of these units may go up or fall depending on how the mutual fund scheme performs to market conditions.

Why should you invest in mutual funds via SIP?

Now that we have established that SIP is a sheer method of investing in mutual funds, it has many benefits. As mentioned earlier, the NAV of a mutual fund may increase or decrease depending on market conditions. Since the SIP sum remains stagnant, the allotment of units may vary. When the NAV is low investors receive more units and vice versa. This is known as rupee cost averaging where the purchase cost reduces over time and investors receive more units as compared to the sum they invest via SIP. Long term investing in mutual funds via SIP may allow your investments to benefit from power of compounding where the profits earned from SIP investments start earning returns of their own.