Why are SIPs the best way to get exposure to mutual funds? An explainer

If you are a new investor considering investing in mutual funds, it is recommended that you consider systematic investment plans (SIPs). For the uninitiated, SIPs enable small investors to purchase mutual fund units at regular intervals, typically every month, every quarter, or every fortnight, across various price points.

The data released by the Association of Mutual Funds in India (AMFI) reveals that SIP contributions has been growing month after month. In July, total SIP contribution across mutual funds stood at ₹28,464 crore, which is 21.9 percent higher than one year ago, when it was ₹23,332 crore.

In this financial year itself, SIP contribution has grown around 7 percent since April, when it stood at ₹26,632 crore (see table below). 

Why should you invest in mutual funds via SIPs?

These are some of the key reasons why you should opt for investing in mutual funds via SIPs:

I. Rupee cost averaging: Essentially, SIPs allow investors to get exposure to funds at different price points. Rather than waiting for price correction, investors can stagger their investment over a period of one year or longer.

By doing this, they can average out their price of acquisition. This is similar to dollar cost averaging, which is an effective strategy for raising the probability of earning returns.

II. Financial discipline: By committing to invest a small amount (say ₹1,000 every month), investors can inculcate a habit of investing. And this practice of investing on a regular basis is better than parting with a lumpsum money.

III. Flexibility: When you want to invest in a mutual fund scheme and are unsure as to which scheme to invest, you can invest in small amounts via SIPs and monitor the scheme’s performance before deciding to make a big investment at a later stage. Alternatively, you can exit the scheme as well without having to incur a big loss.

IV. Convenience: Investors can choose any frequency of SIP that they desire. They may decide to invest every month or every quarter, or every fortnight. They can even decide on any date that they prefer.

It could be the 5th or 10th, or even the 1st of every month. Some investors, meanwhile, believe that one particular date could be better than the other, whereas it is far from true.

“There are many studies that are made to check whether investments should be made on some specific dates of a month, but there is hardly any difference in the accumulated corpus. That’s why one can choose any date for investing in an SIP. If you fear running out of your salary before the SIP date is due, you could choose any date in the first week of the month for investing in SIP,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.

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