What is Systematic Investment Plan (SIP)?
Systematic investment plan or SIP is as the name suggests an investment plan in mutual funds in which an individual can invest a small amount of money on a pre-set date every month in a specific funding company of their choice. It is one of the best ways of putting your money in equity mutual funds as it sets a discipline in the investor. SIP works on the principle of regular investment and is similar to recurring deposits. SIP allows investors to invest in mutual funds with small amounts that get deducted from your linked bank every month. SIP allows investors to buy units every month irrespective of markets trends. In simple terms SIP enables investors to invest in stock market in particular mutual fund in periodic monthly investments instead of one time investment in mutual funds. As an investor you must know what the benefits of SIP are and how it can help you build income.
Advantages of Systematic Investment Plan (SIP)
- Disciplined Approach To Save
SIP inculcates a disciplined approach in you to plan your monthly budget and put aside some money for SIP. This way you form a habit to ensure that your bank has sufficient funds every month to invest in SIP. Regular investment sets a discipline in you and builds your wealth.
- Helps You Achieve Your Goals
SIP helps to achieve financial goals as you can start investing small sums of money. While the amount can be as small as Rs. 500 per month, the benefit from the power of compounding on monthly basis eventually leads to accumulating the required corpus for reaching your goals. It helps you to build your wealth over a period of specified time.
- Compounding Benefits
It is widely being said that the key to building wealth is to start investing early and to keep investing regularly. When you invest a small amount of money in SIP, it grows to large amount of savings. This helps in creating a substantial amount of wealth which includes your own contribution, plus returns compounded over the years. An investor who starts investing in the SIP at an early age certainly stands to gain more than an investor who starts to invest in later age. For example we take A & B as investors and let’s assume A is younger to B by 5 years. At an age of 20, investor B starts to invest Rs. 1000/- in SIP and investor A starts investing same amount at 25 years of age. Assuming both these investors invest for 30 years and investment yields a return of 12% percent, investor B will get 30 lakhs at end of investment whereas investor A will get only 16 .8 lakhs. It is thus best to invest in SIP as early s possible.
- Takes Advantage of Rupee Cost Averaging
In equity or stock market it is never easy to guess when it is right time to invest. You cannot be sure which time will the market go up and this is where investing SIP becomes important. Rupee Cost Averaging is an effective investment mechanism which eliminates the need for you to time your investment in the market. All you need to do is to invest a fixed pre decided amount of money on a pre-set monthly/quarterly/yearly basis. You don’t need to worry if the stock market is up or down as you buy more units when the price is low and fewer units when the price is high. Hence whether it is a bull phase or bear phase, the cost of investment remains same at lower level which allows you to get maximum gains.
- Simple, Convenient & Easy to Monitor
Investing in SIP is a hassle free process as you do not need too many paper works. Once you fill in your application form, all you need to do is provide post dated cheques or link your bank to auto debit the amount from your bank. To track the progress of your investments, you are provided account statements at periodic intervals. And now days you can also follow the same process online as well. All you need to do is choose an equity fund company in which you want to invest and invest in it directly through their website.
- An Easy Investment Plan
SIP is an easy investment plan as do not need to shell out lump sum money from your banks. You can start investing with a minimum investment amount also as SIP investments are flexible and there are no penalties if you wish to end the SIP at any given time.
Considering various benefits of SIP it is only wise to put your money in right use and start investing in SIP. Simply opt for a specific amount in a funding company and see your money grow over the coming years.