Updated: Mar 26, 2021
Disciplined savings! Long-term gains! Flexibility! Convenience! These are the most commonly sought after merits by the investors and SIP has it all!
Systematic Investment Plan or SIP is an easy mode for investing money in mutual funds. An SIP lets you invest a fixed amount of money at regular intervals in a mutual fund scheme. One can start investing in SIPs with an amount as small as ₹500 each month, so no excuses for not investing! Also, since your money is auto-debited from your bank account, you don’t end up over-spending.
Why SIP? SIPs give the twin benefits of “Rupee-Cost Averaging” and the “Power of Compounding”.
Number one: RUPEE-COST AVERAGING helps one reduce the average cost of their investment and also you don’t have to time the market. Let us consider an example to understand this better. Suppose you buy 100 units of a scheme for ₹100 each in April, another 100 units for ₹90 each in May and another 100 units for ₹95 each in June. Thus your average cost per unit turns out to be ₹95. So next month even if you sell all your units at ₹100 each, you earn a profit of ₹5 per unit! Now in an SIP you invest a fixed amount every month, you buy more units of the scheme when the price drops and less of it when the price increases.
Number two: the POWER OF COMPOUNDING. As Albert Einstein once said “Compound interest is the eight wonder of the world. He who understands it, earns it… he who doesn’t… pays it” The sooner you invest, more time your money has to grow. Briefly, SIP plan is all about compounding wealth through systematic investments on a long-term basis
These twin benefits work through different market cycles, thus long-term investment is advisable.
SIPs are just a mode of investing in Mutual Funds, so what ate mutual funds? Mutual Funds are instruments that “pool” in savings of various investors to invest them in share, debt securities, money market securities and the like. In other words, SIP is regular investment in Mutual Funds!
SIP being a mode of investment in Mutual Funds, certain risks associated with Mutual Funds is inherent in it. The return on investment depends on the chosen scheme and there is risk of negative returns or Price Risk. But then, longer the holding period, usually lesser is the impact of negative returns.
Thus SIPs remain a hassle free, reliable and must-try mode of investment!