Mutual Funds & SIPs

Mutual Funds & SIPs

A mutual fund is an investment vehicle that pools money from several investors and invests it in a diversified portfolio of assets such as stocks, bonds, and money market instruments. These funds are managed by professional fund managers through an Asset Management Company (AMC). Investors buy units of the mutual fund, and each unit represents a proportional share in the total holdings of the fund, also known as the portfolio. This allows even small investors to access professionally managed, diversified investment options.

Mutual funds have become one of the most widely invested instruments as they make up for effective diversification, which spreads the risks across numerous securities and offers steady returns to investors. Among numerous investment instruments you can invest in, mutual funds ensure investment discipline through systematic investment over time. Since professional portfolio managers manage the investments, they carry lower risk than other investment instruments.

If you are an investor or are looking to invest to build wealth over time, it is ideal to add mutual funds to your portfolio.
Mutual funds offer diversification, professional management, and the potential for long-term wealth creation.

Systematic Investment Plan (SIP) is a method of investing in Mutual Funds allowing investors to contribute a fixed sum regularly, like monthly or quarterly, rather than a lump sum. This, starting from as low as Rs. 100 per month, is same as a recurring deposit and is hassle-free with automated monthly deductions. Popular among Indian Mutual Fund investors, SIP ensures disciplined investing. It is an ideal long-term investment strategy, emphasizing the importance of starting early and consistent contributions for optimal returns. In essence, the mantra is to “Start Early, Invest Regularly” for the best outcomes in long-term investments.

How does an SIP work?

A Systematic Investment Plan (SIP) functions like a recurring investment. A fixed amount is auto-debited from your bank account at regular intervals (usually monthly) and invested in the mutual fund scheme of your choice.

Once the amount is invested, you’re allotted units of the mutual fund based on its Net Asset Value (NAV) on that day. The NAV changes daily, which means:

When the NAV is low, your SIP buys more units
When the NAV is high, your SIP buys fewer units

This mechanism is known as rupee cost averaging — one of the core benefits of SIPs.
With every SIP instalment, more units are added to your investment. Over time, this consistent investing helps average out market fluctuations.
So, why is SIP considered an ideal investment?

There are two key concepts that explain how SIPs work to your advantage:

Rupee Cost Averaging It cushions your investment against market volatility by buying more units when prices are low and fewer when prices are high — helping average out the cost per unit over time.
Power of Compounding SIPs reward discipline. The longer you stay invested, the more your earnings generate their own returns, leading to exponential growth over time.