Everybody wants to earn more and more, but you only have one life, one job and big many responsibilities and wishes. That is why you invest, but investments owing to market fluctuations are risky. With all the hardships of life you should not deal with the complexities of market ups and downs. And when it is assumed the most assured options of investments for a risk averse citizen are fixed deposits, recurring deposits, PPF accounts etc. SIP is also a great solution for your secured financial future and takes care of the market fluctuations that often get you scared.
What is SIP?
SIP is systematic investment plan which is a beautiful way to invest in mutual funds. It allows you to invest a certain amount at a regular interval that may be weekly, monthly or quarterly etc. A SIP is a planned approach towards investments and do not go too heavy on your pocket.
It is the best way of entering an equity market for making investments in equity mutual funds. SIPs help to achieve financial goals by investing small sums of money on a regular basis that eventually leads to accumulating the required corpus for reaching your financial life goals.
How does it work?
In SIP, a fixed amount of money is debited by the investors from their bank accounts periodically and invested in a specified mutual fund. This can be done by the investor by using postdated cheques or by using Electronic Clearing Services (ECS). The investor is allocated a number of units according to the current Net Asset Value (NAV). Every time a sum is invested, more units are added to the investor’s account. Hence, units are bought at different rates and investors get benefited from rupee cost averaging and power of compounding.
What are the objects of SIP?
Rupee Cost Averaging – With such uncertain nature of market and its unpredictability, many investors are reluctant to enter mutual funds and equity market and remain dubious of the best time to invest and try to time their entry. Rupee cost averaging brings you out of this pickle. With SIP, you become a regular investor, so your investments fetch more units when the price is low and lesser units when the price is high. SIP takes care that your average price works out to be lower than the price you would have paid at the market peak. It takes care that you invest across market cycles; the average cost of investment is eventually maintained at a lower level allowing maximum gains in the long term.
Power of Compounding – The rule of compounding is simple the earlier you start investing, the more time your money has to grow. The wealth accumulation is at its best in the long run. As the time given to the investment increases, the wealth builds at an accelerated pace because of compounding effect. For example, if you start at the age of 25 and invest ₹ 1000 per month, the power of compounding may fetch you up to ₹ 40 lacs, when your investment is only ₹ 4.2 lacs. But if you postpone your investment by just 5 years, you can face a loss of almost ₹ 10-15 lacs in the retirement corpus.
Types of SIP
Amount based SIP – It is a type wherein you decided a fixed amount initially and that amount is invested in your selected share at predefined time intervals that may be weekly, monthly or quarterly.
Quantity based SIP – It is a type wherein you decide a fixed amount of shares of your favourite company to be purchased at predefined time intervals that may be weekly, monthly or quarterly.
Benefits of SIP
- It offers disciplined approach to investments. If you are a salaried employee and desire to save a small portion of your salary every month but not able to, then this option is definitely for you.
- You no more are required to time the market. It offers you a safe way to enter the mutual funds and equity market without the scare of market fluctuations.
- It offers a great deal of flexibility with your investments. While it is advisable to continue SIP investments for a long-term, there is no compulsion. You can discontinue the plan at any time. You can also increase or decrease the amount being invested depending on your availability of money.
- SIP is always advisable to be a long term investment plan. Because of its features of rupee cost averaging and power of compounding, it has the ability to fetch handsome returns over a long investment horizon.
- It is a hassle free mode of investing. You need not worry about remembering the date to make the next instalment. You can give predefined standing instructions to your bank through postdated cheques or ECS and your automatically gets debited from your bank account towards your investment.
Benefit of SIP always lies in starting early. The sooner you begin the more you can take the advantage of compound interest and hence higher returns.