Systematic Investment Plans (SIP) is an investment method whereby an investor invests a fixed sum of money at regular intervals in a mutual fund scheme of his/her choice. This practice of systematically investing inculcates a financial discipline.
SIP may look similar to Recurring Deposits (RD) but there are a few differences.
When you have a long term goal in mind,start saving towards it immediately. The cost of delay is so much. Let us assume that Mr. Kumar aged 40 saves Rs.10000 every month for his retirement. Assuming a return of around 12%, the investment would grow to a Corpus of Rs.1 Crore. To reach this one crore mark, Mr. John aged 45 has to save Rs.20000 per month. He has to save double for a 5 year delay.
Though SIPs are a great way to build wealth, some small investors tend to get swayed by interim market volatility and redeem their SIP investments too soon. Some investors discontinue or redeem their investments in a bear market. This is the worst thing an investor can do to his portfolio. Stopping SIPs when markets are down defeats the whole purpose of systematic investing.
Spreading the portfolio across multiple investments reduces risk. An investor has to choose the investments based on the investment horizon, his ability to withstand the loss and his age. Mutual funds offer a wide range of funds to suit the requirements of Investors.
Generate wealth over a long term
Invest a larger proportion of their corpus in companies with large market capitalization. well-established players with a track record generate wealth slowly and steadily over a long term.
As the name suggests, Multi Cap Funds invest across Large cap, Mid cap and Small cap stocks. While Large Cap stocks provides much needed stability, Mid and Small Cap stocks are expected to spice up the portfolio. It also takes advantage of both growth and value style of investment.
Different segments in the market tend to perform in different phases. Multi Cap Funds can take advantage of it and adapt their portfolios accordingly. Therefore, in the long run, Multi-Cap funds are better wealth creators with lesser volatility.
As the name suggests, Large and Mid Cap funds hold a combination of Large Cap and Mid Cap stocks. While Large Cap stocks provides much needed stability, Mid Cap stocks are expected to add spice to the portfolio.
While a pure Large Cap Fund is suitable for a conservative investor looking for stable return with minimum risk, a Large & Mid Cap Fund is suitable for an investor willing to take slightly more risk for that additional return.
As per recent SEBI’s norms, a Large & Mid Cap Fund should hold a minimum of 35% of the corpus each in Large Cap stocks & Mid Cap stocks.
Mid Caps are described as the investment sweet spot due their ability to make sufficient amounts of money for an investor. These Companies are relatively more stable than Small Caps & have large room to grow than Large Caps.
Whenever economy revives, Mid Caps will outperform Large Caps. One should invest in Mid Caps with a long-term view of around 5 years to realize the full benefit of embedded growth and value creation. Hence, investors who are not in need of their available surplus anytime in near future or whose retirement is decades away, should have an exposure to good Mid Cap funds . You can make volatility in these funds work in your favour by investing via SIPs.
For your information, many of today's Large Caps are yesterday's Mid Caps. Similarly, today's Mid Caps could be tomorrow's Large Caps.
Investors get attracted to Small Cap stocks because of their higher return potential. But, picking a right Small Cap stock is very difficult. They frequently get into problems and their stock price often crashes. Considering all plusses and minuses, it is always better to invest in Small Cap stocks through Mutual Fund route.
Small Cap Funds are best suited for investors with high risk appetite and looking for high returns. They need to keep 2 key things in mind : Long Term outlook and stomach to withstand volatility. Best way to address volatility is to invest systematically (through SIP route) rather than investing at one stroke.
As the name suggests, Focused Funds maintain a concentrated portfolio of few stocks. It can focus on Large Cap, Mid Cap or adopt a simple Multi Cap strategy.
Objective : To deliver increased return by investing in limited number of stocks.
Suitability : As portfolio consists of select few stocks, Focused Funds are more risky than diversified Equity Funds where investment typically will be made in more number of stocks. On the other hand, Focused Funds have the potential to deliver higher return if the select picks perform well. Hence, these funds are suitable for an aggressive investor willing to take extra risk for an increased return.
SEBI's categorization : As per recent SEBI's categorization, Focused Funds can invest in a maximum of 30 stocks & shall mention the area of focus – Multi Cap, Large Cap, Mid Cap or Small Cap.
These are equity mutual funds that have a tax saving component in them. Investing in these funds upto Rs.1.5 Lakhs can save taxes upto Rs.46800. These funds have a minimum lock in of 3 years. They are considered to be the BEST tax saving product as they have the potential to create wealth over long term.
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