Smart ways to invest in SIPs and SIP mutual fund

Smart ways to invest in SIPs and SIP mutual fund

The classic saying of Warren involves ‘being greedy when others are fearful and being fearful when others are greedy’. This explains the philosophy behind smart SIP. SIP mutual funds is a very good tool to increase returns on planned investment over a long term scenario.

Systematic Investment Plan or SIP is a type of investment where investors invest a more or less fixed amount at a fixed frequency (say every month), and the motive behind this investment is long term. This kind aims at great returns after an extended period of investment. It helps investors to be at peace when there are turbulent situations in the money market.

Many companies have launched SIP mutual funds so as to encourage people to invest in long term SIP schemes. The SIP schemes pertaining to mutual funds helps an individual to average the total cost of shares that is periodically bought. A smart way to invest is to buy many units when the price of units is really low and purchase a lesser number of units when the price of units is high. By following this kind of a principle, one can reduce the average cost of buying shares and mutual funds. This, in return, helps one to get better and more returns on investment.

Smart SIP or ‘Value Averaging’:

Smart investment can be done by following some other principles too. ‘Value averaging’ is the technical term used to describe a way in which one can have better returns by investing more and more in real absolute terms. This idea was first put together by Michael Edleson in the year 1988. Edleson, a former professor at Harvard University, had suggested a way in which instalment amount varies. The rule is generally to invest a certain amount at a given frequency (say monthly) in a particular portfolio in a calculated way in which the value of the portfolio rises by a fixed value in each period, based on the calculated rate of return. In this case, the pre-determined value tracks the targeted return of the value in the market. Consequently, what happens is that there is a fluctuation in the market value of the investment. Therefore, when the investment value goes up as compared to the target value, one needs to pay a lesser amount as an investment in the subsequent instalment. Similarly, when the investment value goes down as compared to the target value, one needs to pay a higher amount as an investment in the next instalment. Hence, the primary advantage of smart SIP is that it dictates the goals set and on that basis gives out returns.

SIP mutual fund investments also follow a similar smart trend and is easily comparable to the normal human behaviour while shopping. We generally buy more units of a commodity when price falls. Similarly, we do not buy too many units of a product when prices are high. This is basically a balancing act that we practice in our daily lives. The same holds true for smart investment in mutual funds too. It is a wise idea to invest more in absolute terms when the market is experiencing a fall and invest less when the market is likely to rise.

 

Categories: Finance

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