We keep hearing about SIP investments everywhere. Recently the government has been pushing this idea a lot. A campaign was also run called ‘Mutual Funds Sahi Hai’. I am sure everyone must have come across at least one of the ads on TV and YouTube. But what does all this mean? Can we benefit by investing through SIP investment?
The common ways of investing
To answer these questions let’s first understand the most common ways of investing. In India, Gold and Real Estate takes the first and second place respectively. Followed by that saving in bank accounts, investing in mutual funds and buying stocks have their place in the said order. Out of these options, the investment that pays the highest returns are Stock Market, Real Estate and Mutual Funds. These investments also have a higher risk than the other. Higher risk and higher returns are directly proportional.
Greater the risk greater the return
From the above options, Mutual Funds seem to be less risky in the past. That is because the funds that we invest are managed by a Fund Manager. A fund manager is employed by an AMC or Asset Management Companies. AMCs may usually be banks or NBFCs. A fund manager’s job is to assess the risk in various markets and invest money in them. Since he does this for living it is considered that he knows his job. And as a layman, we are told to trust a person who knows his work better than our judgement.
At banks, when a recurring deposit account is opened it means that every month a set amount will be deducted from the savings account and moved into the recurring deposit account. My parents preferred this way to beat the human’s tendency to spend. If the money is moved automatically and we have no control then that could become a means to continue saving.
Understanding the terms
When I buy a mutual fund I am given two choices. I can either invest a lump sum amount or start a SIP. SIP or Systematic Investment Plan acts just like a recurring deposit. Its an instruction given to the AMC to deduct a set amount monthly and move it into the mutual fund I just bought. But it is not strict like a recurring deposit. I can pause a SIP for a particular month if I am at lack of funds.
But why bother a SIP? I’ll just save money then make a lump sum investment. But whom am I kidding? If I had done that then I wouldn’t have had a need to even write this blog? I lack discipline like many others and SIP helps here. Any investment requires being regular. Persistence is very important. Having a SIP method of investment helps a lot here.