Listen to this article
In the latest article of Passively Active, an investor awareness initiative by Mirae Asset Mutual Fund, the fund house explains the benefits of doing Systematic Investment Plans (SIPs) in passive funds.
SIP in passive funds is a simple and cost-effective way to create an investment portfolio.
SIPs are like reverse EMIs where instead of repaying a loan, investors can buy units of mutual funds every month or every quarter. Investors simply need to commit a date and amount that may be deducted from their bank account every month or quarter to buy units of mutual funds. Many salaried individuals and working professionals use SIPs to create their investment portfolio.
Among passives, investors may do index funds and fund of funds (FoFs). Doing SIPs in passive funds can be beneficial for many. Let us see how.
Benefits of doing SIPs in passives
Low-cost way to accumulate Mutual Fund units: SEBI regulations say that index funds and FoFs may charge total expense ratio (TER) of up to 1%. This reduces the cost of investment for SIP investors and enables them to accumulate more units with similar monthly or quarterly contribution.
Takes care of asset allocation needs: There are a host of index funds and FoFs investing in equity, debt and commodities like gold and silver. By doing SIPs in index funds and FoFs, investors can create a well-diversified portfolio by investing across each asset class.
Offers simplicity: Since index funds and FoFs mimic the performance of underlying index, investors who do not have time to monitor scheme performance and do research can simply start SIPs in index funds and FoFs based on their risk appetite and investment objectives.
Flexibility: SIPs offer flexibility to invest in passive funds. Investors can increase or decrease their SIP contribution. Also, they can discontinue or pause their SIP contribution at any time.
Utility of SIPs in passives
Investment goals: Investors may achieve short term, medium term and long-term goals through SIPs in passive funds. For instance, SIP in a liquid ETF FoF can be used to create an emergency fund while SIP in a Nifty50 index fund can be beneficial for creating wealth in the long term.
No risk of timing the market: SIPs in passive funds reduce the risk of timing the market. Through SIPs, you invest across market cycles by accumulating more units during bear phase while less units during bull run. Overall, it averages out high and low market movements.
Risks
While SIPs reduce risk of market timing, investors cannot avoid the risk of volatility in their investment portfolio. Also, investors have to completely rely on the underlying index.
Conclusion
SIP in passive funds like index funds and FoFs is a cost-effective way to create an investment portfolio. In addition, there is no risk of underperformance as passive funds mimic market returns.
IAP Disclaimers
An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund. All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Center section available on the website of Mirae Asset Mutual Fund.
Visit cafemutual.com now to read this article and share it with other investors.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.