Of all the financial vehicles of investment, Mutual Funds (MF) have come out a winner all the way.
What are Mutual Funds?
All of us have heard about MFs very often but hardly understand what it stands for or how it functions. A mutual fund is essentially a common pool of money contributed by investors and then invested in stocks, bonds, money market instruments, gold, and other similar assets, in accordance with the objective of the fund.
Why are Mutual Funds best investment options?
The biggest advantage of MFs is that they are managed by professional fund managers and as an investor, you don’t have to fret over the risks associated with funds or of a rising or falling market.
How do you invest in Mutual Funds?
In your journey towards wealth creation, MFs offer you different investment options– you can opt for Monthly or yearly SIP.
SIP= Systematic Investment Plan
Which is better- Monthly or Yearly SIP?
Ask this question to any investment professional and the majority will come out in favor of the investment option of a Monthly SIP above the yearly. The reasoning behind the preference given to monthly SIP needs to be examined critically.
This is why Monthly SIP is better than Yearly SIP
- Disciplined Saving: Best for salaried class, fixed monthly income people as fixed installment goes to the mutual funds on a stipulated date. In yearly SIP a lump sum amount needs to be deposited which might create pressure on the investor.
- Rupee-Cost Averaging: The SIP route gives the opportunity to invest in the markets during higher levels as well as lower levels, and ensures a weighted average return over a period of time. If you opt for yearly SIP then you shall completely lose on the benefits of averaging, thus, not able to capitalize on market fluctuations.
- Power of Compounding: A SIP enables you to reap the benefit of compounding as you get to earn returns on the returns generated by your investment. This cannot be availed if you select a yearly SIP route as you will be investing only once a year.
It is true that most investment planners will ask you to go along with monthly SIP but a lump sum yearly SIP investment can also be recommended when due to any severe event or a crisis, the market sees corrections.
For example, now the Coronavirus lockdown has brought the market valuations level to a very low & attractive level, and therefore, investing a lump sum at such a time will surely help create long-term wealth.
Risk comes from not knowing what you are doing- Warren Buffett
The bottom line is that as an investor you should be aware of all pros and cons and be able to make an informed decision. And whatever route you select, make sure to stay invested for the long term as it does not work efficiently for a time horizon of fewer than 5 years. If you are still confused and don’t want to take a blind risk. Then you may get in touch with the Fincart Team today. In order to seek good investment advice.