Systematic Investment Plan, also known as SIP, is a godsend investment avenue to those investors who desire to multiply their capital efficiently without parking too much of their money in a single asset class at any given time. But, before we dive deep into it, let’s recall what a mutual fund is.
What is a mutual fund?
A mutual fund is a professionally managed investment vehicle wherein an AMC (Asset Management Company) pools the money of several investors and invests it in different securities such as stocks, bonds, money market instruments, etc. Aiming to fulfil the financial demands of varying investors, there are several types of mutual funds available to an investor. You can invest in mutual funds either via a systematic approach – SIP (systematic investment plan) or in one go – lumpsum investment. Owing to the several benefits of SIPs, they have gained immense popularity in the past few years. Let’s understand in detail about these investment tools.
What is an SIP?
SIPs are a way to invest in mutual funds in a disciplined manner. Under SIP investment, an investor invests a specific amount at regular intervals in their desired mutual fund schemes for a pre-determined period of time. The specified investment amount gets debited from the bank account and is credited into the fund’s account. The SIP amount can be as low as Rs 100 per month. The periodicity of the SIP intervals can be daily, weekly, monthly, quarterly, annually, etc.
Benefits of investing in SIP mutual funds
Following are some of the benefits of investing in mutual funds via SIP:
- Timing the market
New investors are often confused about when to enter the market. If you invest a substantial amount at a time, there’s a higher probability of losing a significant portion of your investments when the market crashes. But, with SIP investment, your capital is spread over time and thus, only a portion of your investment will face market instability and volatility.
- Rupee cost averaging
SIP mutual funds permit you to invest at varying levels of the stock market cycle. When the market is stumpy, the fund manager ends up purchasing more units at lesser price and could sell the units when the market is at its greatest. This reduces the average cost of purchasing each unit of mutual funds.
- Power of compounding
You must be well-versed with the phrase – ‘The longer you hold, the higher benefits you reap’. SIP helps to accumulate considerable wealth over a period of time. As your returns further earn returns on its own, your money gets multiplied over time.
- Instils the habit of investing
Since investing in SIP mutual fund requires an individual to invest a particular amount regularly, it instils a sense of financial discipline among investors and helps to meet financial goals.
- Easy on your pocket
SIP investment deflates one of the most common myths prevailing against mutual fund investment – you need an awful lot of money to invest in mutual funds. Contrary, you can invest the money as low as Rs. 100 per month.