Investing online in SIP is fairly simple. But is it the best way to invest in Mutual Funds?

Equity is an asset which has a track record of earning double digit returns in the long term – typically 12% - 15%. No other asset class has consistently delivered these kind of returns.

Further, equity as an asset class has been known to beat inflation in the long-term and is a much better option than bank FDs, real estate and gold.

And, equity mutual funds provide the easiest option to invest in equities. A comparision of how ₹ 10,000 per month in SIP will grow vis-a-vis Fixed Deposit

Stock markets (and in turn Equity Mutual funds) are fairly volatile in the short term. By investing every month through SIP, you buy mutual fund units at different prices. This helps in averaging your overall purchase price over time.

The impact of this averaging is that by reducing the volatility, it reduces the overall risk associated with equity mutual funds.

Below is an actual example of how your average purchase price moves as you do an SIP for 10 years vis-a-vis actual NAV every month.

You have a 5-year objective of buying a car that is going to cost ₹ 5,00,000.

You are fairly confident that equity mutual funds are going to give you a return of around 12%.

A quick calculation tells you that if you invest about ₹ 2,85,000, you should be able to withdraw ₹ 5,00,000 after 5 years. This will enable you to buy that dream car.

However, there’s a problem. You have no money to invest today! SIP can be a good solution here. If you invest a small sum of money into equity mutual funds every month for 5 years, probably you still will be able to buy that car.

A rough calculation tells us if you invest around ₹ 6,000 every month and if the money grows at the rate of 12%, you should be able to accumulate ₹ 5,00,000 for that car.

SIP is a good example of the phrase – Slow and steady wins the race! Learn more on how to define financial goals and achieve them

SIPs not only inculcate Financial discipline, they are a super convinient way of investing in mutual funds.

Let’s take a salaried individual like you. You earn a salary every month. Your salary has two components from your perspective – expense and savings. Expense is what goes into paying bills, buying grocery and other essential utilities. Savings is what is left after expense is taken care of.

Every month you have a certain portion of your salary saved. What can happen with this saving? You can either keep this money in your savings bank account or you can start an SIP in mutual funds.

Once you set up an SIP, a fixed amount is automatically debited (and invested) every month from your bank account which makes SIP extremely convinient.

Plus, you are forced to keep that amount handy every month leading to a much stronger financial discipline.