What is mutual fund SIP?
A systematic investment plan (SIP) is an investment vehicle offered by many mutual funds to investors, allowing them to invest small amounts periodically instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly.
How SIP works?
SIP is a method of investing a fixed sum, regularly, in a mutual fund scheme. SIP allows one to buy units on a given date each month, so that one can implement a saving plan for themselves. The biggest advantage of SIP is that one need not time the market.
There could be only one Disadvantage.
Mutual Funds are not immune to fall in markets.
Systematic Investment Plan (SIP) is a method to invest in mutual funds through which you invest a fixed sum periodically in a fund. There are numerous benefits of SIP and in this article we will discuss about them.
1. Discipline
As the name says, the investment in an SIP is systematic. Investing through SIP inculcates discipline. In an SIP a fixed amount is deducted every month from your account and invested in your selected fund. So, once you have set up the SIP by selecting the amount and number of installments, you don’t have to do anything apart from ensuring that your bank account has the money available in it on the installment date.
2. No Timing the market
Investors are always in a dilemma that if it is a right time to invest or not. No one can predict which may the market will move or if the market has achieved its peak or low point. Investing through SIP resolves this dilemma as it is a periodic investment which occurs across market cycles. SIP is not free from the market volatility and the fund value may go down, but it frees you from the worry of market movements.
3. Rupee Cost Averaging
As mentioned above in SIP investment is done across market cycles. When the market is high you get less units and when it is low then you get more units and hence your investment is averaged out. This helps the investor to not worry about market volatility and keep on investing while accumulating the wealth.
4. Achieve your Goals
SIP is a great tool through which you can achieve your financial goals. Say, you want to buy a car in 5 years which costs Rs 7.5 lakhs. Accounting for 6% inflation in 5 years it will cost approx. 10.04 lakhs.
If you invest in a mutual fund which gives you 12% yearly returns for 5 years, you will need to invest approx. Rs. 5.7 lakhs to achieve your goal.
However, if you go through SIP route, you need to invest only Rs. 12,593 Rs. per month for 5 years in the same fund where you expect to get 12% return.
This shows that through SIP you can achieve your goal by investing a relatively small amount monthly.
5. Guilt Free Spending
When you have done your investments for your goals at the start of your month through SIP, then you can spend rest of the salary as you want and you won’t have the guilt of not utilizing or saving the money at the end of the month.
6. Power of Compounding
When you start to invest early and invest for long term, you take benefits of power of compounding. For example, a monthly SIP of just Rs. 1000 done for 30 years will yield you Rs. 30 lakh if your investment earns a return of 12%.
However, if you start late by 5 years, then the same investment of 1,000 Rs. will yield you just Rs. 16.8 lakh which is 45% lower than the SIP investment started just 5 years earlier. Hence, even if you have only a small amount to invest, you should start an SIP as early as possible.
7. Easy to invest
SIP can be started for an amount as low as Rs. 500. Investing in SIP is a hassle free process as the amount will be deducted monthly from your bank account automatically once your one time mandate is approved.
There are numerous benefits of SIP for the investor and it is the perfect method to accumulate wealth by regular investing over time. What are you waiting for, start an SIP today.
