WHAT IS SYSTEMATIC INVESTMENT PLAN (SIP)?
A Systematic Investment Plan or SIP is an ideal and easy way to invest in mutual funds. SIP permits investors to invest at regular intervals with a predetermined amount. A SIP is considered as a planned process which ultimately helps in elevating investors’ habit to save and thus generate a mechanism to save sufficient wealth for the future.
An investor can invest in a SIP on a quarterly, monthly or weekly basis based on their preferences. SIP in mutual fund scheme can be started by investors with as minimum as Rs.500 per month.
How to start with SIP investment?
Before actually investing in a SIP, there are few points that investors should keep in mind:
- Set your financial goals beforehand. One should be aware of the goals and objectives and hence should prepare reachable, clear and specific goals.
- Investors should set a timeline for their investments. That is, they should know when they will need the money which will eventually clearly define the line of their investment duration or tenure.
- Deciding the amount you can invest is another important aspect. Investors can use SIP calculator to compute how much money is required to be invested regularly in order to attain your financial objectives.
- The last step would be to finally make a choice. Investors should seek assistance from financial advisors to choose the plan that suits best according to their goals and requirements.
HOW DOES SIP WORK?
Systematic investment plan works almost like mutual funds. Market experts carry out the management of money and other aspects. There are two mechanisms that facilitate the working of SIP:
- Effect of compounding
As not in the case of simple interest, compounding effect makes the interest earned added in the base capital and the following interest is computed on the new increased capital. Hence, the exponential growth of money is the outcome of compound interest. The effect of compounding interest increases with the increase in tenure of the investments.
- Rupee cost averaging
Since the volatility remains in the market, it becomes difficult for investors to comprehend the ideal time to invest and enter into the market. Therefore, rupee cost averaging helps remove the confusion. Since investors invest regularly, their money is expected to yield more units when the price is low and few units when the price becomes high. This may help investors to acquire a lower average cost per unit during the volatility.
BENEFITS OF SIP
- Flexible and affordable investment
A SIP investment can be started with a minimum amount, thus making it affordable for every kind of investor. However, once invested, you can always increase the value of your investments with the increase in earnings over a period of time.
- No charges levied on entry and exit
You can start investing in SIP with no extra charges. Moreover, once invested but realizing at a later point that it is not for you or incurring loses, you can choose to opt out anytime you want without having to pay any sort of penalty.
- Saves time
Investors can choose Electric clearing service (ECS), wherein bank will automatically debit the amount at regular intervals and hence saves your time.
Investors do not need to keep the track of market trends or the latest news as the market experts are there to carry out all those operations.
- Long term gains
Rupee cost averaging and the effect of compounding ensures higher returns over a long period of time.