A lot of people opt for mutual funds to earn extra revenue for a retirement fund. That’s because some might find the income earned from full-time employment is not enough. That’s why people keep aside a portion of their monthly income to pay for mutual fund investments. Mutual funds are an investment tool in which money is collected from a group of like-minded investors by an AMC, i.e., an asset management company. Afterwards, the money collected in the fund is used by the AMC to purchase a wide range of financial securities. The revenue earned from a mutual fund investment is divided proportionately among the investors. Introduced in India in the 1960s, over the years, mutual funds have gone on to become one of the preferred investment schemes amongst a majority of middle-class Indian families.

To pay for these investments, you will be provided with two options or modes of investment you will. One is lump-sum investments. Under lump-sum investments, you need to make a one-time payment to the AMC. You can go ahead with lump-sum investments only if you have the investment amount at your disposal. In case you don’t, please don’t go through the trouble of arranging the funds. Instead, you can opt for a systematic investment plan or SIP.

What is a SIP?

In terms of factors such as nature and function, experts will tell you that SIPs are different from the lump-sum investment mode. These plans are an investment mode in which a fixed amount is deducted from your bank account on regular basis (monthly deductions are a common example). This mode of paying for mutual fund schemes makes sure that you don’t fall pressurise yourself for arranging the funds for a lump-sum investment.

Also, SIPs don’t burn a hole in the investor’s pocket. With these plans, to pay for investing in the mutual fund scheme of your choice, you can leave a standing instruction with the bank. This standing instruction automatically deducts from your savings bank account at regular intervals specified by you. The feature of standing instructions ensures that even if you ever forgot the payment date, the payment for mutual funds investment goes through smoothly.

How does SIP work?

When you choose a SIP as a mode of investment, a certain sum of money is deducted from your bank account on a specified date. Through these plans, you can purchase a certain number of fund units. With SIPs, your funds are invested in the market regardless of the current market conditions. This means that under SIPs, there is no requirement to time the market. After identifying both the frequency of investment and investment tenure, you can choose to automate your payment to invest. To activate automatic payments, you can leave a standing instruction on your bank. Through standing instruction, a certain sum of money is deducted from your bank account into a mutual fund scheme of your choice. With standing instructions, you also need to provide the specific date of deduction.

What are the benefits associated with SIPs?

• SIPs helpful for conservative investors:

Conservative investors are the investors who want their money to grow but don’t want to risk their principal investment. These plans are suitable for such investors. Under SIPs, all that’s required of you is to pay a small sum from your bank account regularly. Also, as only a small amount is paid, you don’t need to worry about the budget. Also, all that’s required of you is to determine your monthly investments, which can be done by using the SIP calculator.

• These plans are not expensive:

Unlike lump-sum investments, where the payment for mutual fund investments is carried out at once, with SIPs, you can pay regularly. You can start at a low sum. And, as time passes, and if there is an improvement in your financial situation, you can increase payments.

• They come with the benefit of compounding:

Under systematic investment plans, the return generated through the mutual fund scheme you are investing in is reinvested. With time, this repeated action may result in a snowball effect. In simple words, it means that the return on your mutual fund may increase over time if you were to hold on to the mutual fund scheme for a long time. You can enjoy the benefit of compounding by choosing to extend the investment tenure for a long time.

So, the question remains. Which SIP is recommended for an investment tenure of 15 years? The answer to the question is dependent on your choice. You can use the internet to find the best-performing plan.