You must have heard your relatives and friends say SIPs or systematic investment plans are the best way to invest in mutual funds. So what are these SIPs? SIPs are not mutual funds but just a way of investing in mutual funds. Systematic Investment Plan popularly called SIP allows you to invest small sums of money regularly, say once each day, month or fortnight in a mutual fund.
Investing in mutual funds through SIPs has many benefits. SIPs inculcate financial discipline in life as you have to be regular with investments. SIPs help average purchase costs. You get more mutual fund units when stock markets are down and lesser units when stock markets rise. SIPs help enjoy the power of compounding. This is basically return on return.
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The Government had launched the popular campaign Mutual Funds Sahi Hai. A lot of people in India have been following Mutual Funds Sahi Hai. SIPs are now the buzzword in Mutual Funds. Invest just Rs 500 a month and accumulate a large corpus at retirement. This is what investors have to say about SIPs. "SIP aur bhi jyada sahi Hai."
Yes, SIPs are a great way of investing in mutual funds. The problem is SIPs are not a guaranteed way to success. Just see what investors are saying these days, Which are the best SIPs to invest? They don’t ask which are the best mutual funds to invest?
This doesn’t mean SIPs are not the right way of investing in mutual fund. SIPs are great but only fools would believe nothing could go wrong if they invest in mutual funds through SIPs.
Take a look at this fact. More than 80% of investors started investing in mutual funds in the last 5-6 years. Most of these new investors haven’t seen the downsides of the stock markets which happened in the year 2003, 2008 and 2013. In the 2008-2012 period, stock markets crashed more than 60% from their peak.
Stock markets have periods of low return, no return or negative return. There are times when the economy is down and the GDP (Gross Domestic Product) is severely hit.
What do investors do in these tough times? Well, they terminate SIPs immediately. Many of them swear they will never look in the direction of the stock markets.
This begs the question, Do investors believe in SIPs only during the good times? If you want to enjoy the true power of SIPs, stick with them during the bad times. The true power of SIPs is known in bad times and sadly, this is when most investors terminate SIPs.
See Also: How Mutual Funds Invest Your Money?
Let’s say you have invested Rs 10,000 a month in SIPs over 5 years. The total amount invested is Rs 6 Lakhs. The current value of the investment in mutual funds is Rs 4.5 Lakhs. You are in losses. This is negative returns as you have lost money.
Ask yourself this question, Would you continue SIPs for the next 5 years. If the answer is No, stop the SIP Right Now. Quit the SIP and invest your hard earned money in an FD or an RD. Be a conservative investor. The power of mutual funds is compounding returns or return on return. You need to stay invested for a few decades if you want to see wealth in mutual funds.
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