Saturday, September 4, 2010

Mutual funds (SIPs): Best for long term

It is probably the simplest way of investing that your money counts in the long run. Mutual fund is a fund managed by an investment company with financial objective of generating higher rate of return. Systematic investment plan or SIP in mutual fund category is one of the disciplined ways of investing one's money in order to take advantage of the volatility and diversification in the market. In it, an investor invest a prespecified amount in a scheme at prespecified amount in a scheme at prespecfied interval at NAV( net asset value).Yet, SIP that have easily outperformed key indices in long run are not especially helpful if you don't invested your money for at least 2-3 years.

With the SIP facility one can invest even Rs 500 on a regular basis for chosen period .The small but regular investment used to buy MF unit over the year slowly grows into a big corpus, enabling one to meet long term goals. Simply, it works on average costing of yours money. For example an investor invest Rs 500 per month in HDFC TOP 200. Then he will get 2.5 unit of that MF. Per months units are accumulate over a time of period. Investor gain units according the per month NAV of that fund. When investor want to redeem his investment, he will get the amount which is equal to the multiplication of total accumulated unit and that particular months NAV in which he is going to redeem the investment. If we are investing for longer term then units more or less on increasing pattern and that give higher rate of return.

But like any other investment idea SIPs too have their pitfalls and wouldn't give you much if you invest for a shorter period of time, or close to the market peak. Taking SIPs for short term would not be hugely beneficial, especially in a rapidly rising market. For instance during October 2007 and march2008 in Indian market, Investor lost their money.

Praveen Kumar Yadav