For retail investors, SIP or Systematic Investment Plan is increasingly becoming synonymous with mutual fund investment and for all the right reasons. Before delving more into SIP and how it is an ideal investment method for most investors, let’s recall what is a mutual fund.
A mutual fund is an investment tool that pools the money of various investors and invests them in different securities based on the fund’s investment objectives. This portfolio is managed by a professional known as the fund manager who invests the combined money in a combination of debt and equity instruments. You can purchase into these mutual funds with lumpsum or SIP investments.
SIP is an investment vehicle offered to various individuals by several fund houses wherein an individual can invest a specific amount periodically in his/her desired mutual fund. The specified amount gets debited from the investor’s account periodically on a date pre-determined by the individual. The debited amount goes towards buying the units of the mentioned mutual fund(s). Just like there are numerous benefits available to individuals who invest in mutual funds, investing in SIP is quite beneficial as well. Let’s find out how:
Ease of investing
Investing in SIP is quite easy for investors. An individual can choose their desired investment amount, the frequency of investments, and even the date on which he/she would like the transaction to take place. If you are wondering how to invest in a SIP, it’s quite simple and easy as well. Just sign up with the mutual fund house you wish to invest in or with an online aggregator, select the preferred amount you’d like to invest as well as the date for the investments. You can use a SIP Calculator to calculate the returns you would earn on your SIP investments and also tells you how much you would need to invest every month to earn a target corpus. It is that simple.
Rupee Cost Averaging
Since investments in equity mutual funds are subject to market volatility, SIPs aid to ride out this instability by investing regularly. When the markets tank, you end up buying more units at a lesser price and vice versa when the markets go up. This is known as rupee cost averaging. It diminishes the overall effect of market fluctuations on your mutual fund investments.
Instils financial discipline
Through SIP investments, you regularly invest irrespective of the volatility in market movements. This sense of discipline is crucial to investment success. Also, since your investments are automated, it is unaffected by your greed or fear.
invest a small amount
SIPs do not require you to invest a huge amount of money. This makes them an ideal investment vehicle for almost all investors as everyone can afford it. With SIPs, you can invest as low as Rs500 per month.
Power of compounding
Compounding is a long-term investment strategy. Since SIP investment requires you to invest your money for a long duration, ideally 5-7 years, the magic of compounding works towards wealth creation. This is because when you reinvest the interest earned on your investments, your returns start earning, thus enabling more returns for you.
SIP is an investment habit that can help you gain substantially over a period. Start investing in SIP today to multiply your money. Happy Investing!