With a significant portion of an investor’s financial security resting on smart investments, it’s no surprise that everyone strives to take the ideal approach when entering the market. However, different investors have different strategies based on their preferences and circumstances – some investors opt for active investing while others strive to keep a passive approach – and that’s where index mutual funds become useful.
An index fund tracks the performance of an underlying index (a specific stock market benchmark) such as Sensex or Nifty, which contains many different stocks from various companies. By investing in an index mutual fund, investors essentially invest in all those companies at once. As those stocks increase or decrease in value, so does one’s mutual fund investment portfolio, thereby helping minimise their overall risk while still providing some potential for returns depending on how well those companies perform.
One question that often arises for investors looking to invest in index funds is whether they should opt for a lump sum or a Systematic Investment Plan (SIP). While both modes have their own advantages and features, there are certain unique features of an SIP investment that make it beneficial for index funds. Here are some of the most important ones.
- Rupee-cost averaging averages out the purchase unit over time
When investors invest in mutual funds through an SIP, they get the opportunity to capitalise on the benefits of rupee-cost averaging. It refers to the process where investors contribute small amounts of money at regular intervals instead of buying all at once. By doing this, the investor takes advantage of market fluctuations by buying more units of the index fund when prices are low and fewer units when prices are high. Over time, this can help smooth out any fluctuations due to market volatility and provide greater returns on investments than if they were lump sum payments.
- Encourages disciplined investment and eliminates the need to time the market
Experts often recommend investors invest in SIP plans as it encourages disciplined investing habits. Setting up auto payments for SIP plans makes the process even more convenient and requires less effort from the investor. Moreover, since investors are contributing small amounts regularly over time toward the index fund, they don’t need to worry about timing their purchases or trying to anticipate market movements. With discipline comes consistency; by investing consistently over time, one can potentially achieve greater returns than if they try to time the market or buy large sums all at once.
- Small investments, so there is less risk
Most SIP mutual fund plans for index funds have a minimum requirement of Rs 500 with many requiring even less to start. This makes it easier for individuals who may not have much capital available upfront but still want to start building their portfolio right away without having to wait until they have enough saved up for a lump sum payment. In addition, since investors only contribute small amounts each month, any losses due to market volatility won’t be too severe either, giving them more control when making future investment decisions without too much risk involved.
Closing thoughts
SIPs in index funds can offer many potential benefits for investors, including the ability to invest small amounts of money regularly, the opportunity to take advantage of market fluctuations, and the chance to diversify their portfolios. Moreover, with the help of a mutual funds’ SIP calculator available online, investors can compare different plans, understand their investments better, and create a tailor-made plan accordingly for optimum returns.