When you say mutual funds, most investors tend to immediately equate it to the share market. They believe investing in a mutual fund scheme is the same as investing in shares. But it is not so. If an investor buys shares worth Rs 5,000, he will have bought shares of only one company. However, when he invests Rs 5,000 in a mutual fund scheme, he effectively buys a portfolio of 30 to 35 shares, minimising the risk of investing in the share market to a great extent.

Minimise risk

Investing in mutual funds also has a certain amount of risk because the underlying investment in the scheme is equities. However, with the diversification, the risk is minimised. To further reduce the risk, one can invest in a scheme through systematic investment plans (SIPs). Though the SIP route has become very popular, it has been noticed that the investments are stopped as soon as the markets fall. This is a wrong practice.

Investing through SIPs is nothing but wealth accumulation. Since the investment happens on a monthly basis, one can consider it as a saving. Such savings through SIPs need to be for the long term. Here long term would mean 5 years and above.

Stopping an SIP when markets are in a poor shape is the worst investment decision a person can take.

To get higher returns, a SIP period needs one or two market falls during its tenure. So, when the markets tank, an SIP investor should be happy, while an investor putting in a lumpsum amount has reason to worry.

A newsletter from Crisil indicates that if you look at the past 10 years, an SIP investment of Rs 1,000 — from 2001 to 2011 — would yield around Rs 5 lakh with a total investment of Rs 1.2 lakh. The return here is about 24 per cent.

In the future, however, you may not see such kind of growth. If you assume a similar rate of growth, a saving of Rs 1,000 over another 5 years, that is 15 years, will see the investment grow to about Rs 15 lakh against a total saving amount of Rs 1.8 lakh. For a period of 25 years, the amount will be around Rs 1.7 crore.

I must add here that these figures are based on past performances.

Even if you make half of the Rs 1.7 crore after investing for a period of 25 years, you will still accumulate about Rs 70-80 lakh. For an investment of Rs 1,000 a month, this is a handsome amount.

Retirement solution

This being the case, why not look at SIP for retirement planning? The moment a person gets a job, which could be around 25-26 years of age, he can start an SIP for Rs 1,000 in a good diversified mutual fund scheme with proven track record.

By the time the person is around 50-years-old, he will have accumulated a large amount. This can make a good retirement fund. If instead of Rs 1,000, he puts in Rs 2,000, the accumulated fund will escalate further.

With the same logic, when a child is born, start an SIP of Rs 1,000 for 25 years. The investment will take care of the child’s marriage.

A common proverb says every drop makes an ocean. Similarly, regular and disciplined investments through SIPs are a very effective method of building a substantial fund.

The author is deputy chief executive officer, the Association of Mutual Funds in India