What is a Mutual Fund And How To Create Wealth Using It?

When investing in a mutual fund scheme you put in a lump sum amount or do it in a staggered manner using the systematic investment plan (SIP) route. Many consider the SIP to be a gateway to wealth creation. This is because it is an easy and flexible way to invest. 

As the name suggests, the SIP is a systematic way of investing a fixed amount, on a fixed date (usually on a monthly or quarterly basis), for a fixed period of time. And SIPs can be used to invest in any mutual fund scheme.

There is SIP calculators that help you calculate the wealth gain and expected returns for your monthly SIP investment. You get a rough estimate on the maturity amount for any monthly SIP, based on a projected annual return rate.

Who can invest via SIP?

There are no eligibility criteria for investing via SIP. Anyone can invest in the mutual fund. So, the earlier you start and the longer you stay invested, the more you will benefit from compounding and cost averaging.

Missing an SIP date

If on the specified date there is no money in your bank account, there will be no purchase for that month. There is no penalty charged by the AMC for missing SIP instalment. However, a bank may charge you for 'ECS' debit returns. Regular missing of SIP payments may lead to the closure of SIP.

Closure of SIP

As an investor, if you know how to start a SIP, it is equally important to know how to close one. You may want to close it for various reasons, like the fund is not performing well; you have lost your job and cannot afford to invest anymore and so on. 

Variants of SIP

Mutual fund houses have introduced different variants of SIPs, here are some of them.

Top-up SIP: The SIP top-up facility which allows the investor to increase his SIP amount either by fixed amount or as a percentage. Suppose you are investing Rs 5,000 per month and you want up the SIP amount by Rs 1,000 the next year. Then you can simply choose this option given on the SIP registration form and mandate the AMC that after one year, they should debit Rs 6,000 from your bank account.

On the other hand, if you have chosen the percentage top-up option of say 10 per cent, then Rs 500 will be additionally debited along with your existing SIP of Rs 5,000 from next year.

Flexi SIP: Flexi SIP works on the principle of 'buy low, sell high'. It continues to invest more when market valuations are low and vice versa. Here the investment date is fixed, however, the amount is not fixed.