Mutual funds are equity based products with the potential to offer high returns but only if one invests properly and stay invested long term. Most of the investment in Mutual Funds in India happens during the year end as part of the tax planning. Most people end up buying units at one time basis depending on the market prices. If the stock market is high they end up buying units at high price and if the markets are down they get the units at a low price. So it’s all a matter of chance.
Majority people in India are not much aware regarding the functioning of the stock market. And investing directly into equities without proper knowledge is dangerous. The safest way to gain exposure to equity is through mutual funds. But buying units of mutual fund at one time basis makes little sense. The best way is to acquire the units over a period of time. And one can do this through the SIP (Systemic Investment Plan) route. All Mutual Funds offer this facility to the investors. SIP allows you to invest a certain amount per month/quarter in Mutual Funds over a period of time. This investment can be as low as Rs 500 and there is no maximum limit. So when you buy the units through SIP route you do not have to worry about timing the market. In SIP method, you buy the units regularly on the prevailing unit value. And this gives you the benefit of rupee-cost averaging. Under rupee-cost averaging your monthly SIP amount buys more units when prices are low. And when the markets high, you end up buying fewer units as the prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when maximum investors are tensed and are exiting the market. Through SIP your entire capital is never at risk. And over a period of time your average price paid per unit also comes down. SIP allows you to use the inherent volatility of equity prices to enhance your returns.
Investing in Mutual Fund through SIP might not offer you a terrific rate of return but in the long run it offers more return than conventional savings schemes like bank deposit and post office savings. And the risk is also significantly less.
