SIP is not a scheme, fund, stock, or investment avenue, but a style of investment. SIP is a vehicle to periodically invest in a fund or scheme as per your choice. This article sheds light on all the details about SIPs.
In this article will know about SIP Investments, How SIPs function and the advantages of investing in SIPs.
What Does It Mean to Invest in a SIP?
SIP or Systematic Investment Plan is a popular way of investing in mutual funds. A SIP is a systematic plan of investment, allowing an investor to invest a fixed amount in selected mutual funds at predetermined intervals. The fixed amount of investment can be as low as ₹500, while the predetermined SIP interval can be on a weekly, monthly, quarterly, semi-annually, or annual basis.
The SIP route allows an investor to invest in a time-bound manner, without having to worry about the market dynamics and benefit from the investment in the long term due to SIP’s average costing feature and the power of compounding.
How Do SIPs Function?
There are two principles one should know about SIP Investments on which they function:
1. Rupee-Cost Averaging
Rupee cost averaging is a concept that allows an investor to take advantage of the market volatility and eliminate the guessing game of market performance. Investing regularly ensures the average purchase cost is evened out in the long run.
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An investor gets more units when the Net Asset Value (NAV) is less, and fewer units when the NAV is high. In other words, with the rise of the market, you get fewer units, and with the fall of the market, you receive more units. Therefore minimising the risk and ensuring that you acquire investments at a lower average cost per unit.
2. Power of compounding
The concept of the power of compounding means reinvesting the investment leading to the compounding of the interest and helping in long-term wealth creation. There will be an exponential impact on your investment as a result of saving a small sum of money regularly for long periods, because of the effect of compounding.
To understand the power of computing better, let us take the help of a simple example.
Assume that person ‘A’ has decided to invest a monthly SIP investments of ₹1000 on his 30 birthday. Assuming a return of 7%, the total corpus of ‘A’ at the end of 20 years will be ₹5,28,000.
Now assume that person ‘B’ starts investing for his 60th birthday at the age of 20. ‘B’ has decided to make a monthly investment of ₹1000 at the age of 20 in SIP. Assuming returns of 7% for the monthly investment, the total corpus for ‘B’ at the end of 40 years will be ₹26.56.436, which is almost five times the corpus accumulated by ‘A’
This proves that regular investments for longer durations yield more significant profits and returns.
What Are the Advantages of Investing in SIP?
Here are the benefits one should know about SIP Investments:
- Flexibility: There is a lot of flexibility provided by SIPs. You can decrease or increase the investment amount at any given point in time
- Financial Discipline: Regular investments in SIPs breed financial discipline. It encourages savings and helps you accumulate a corpus without affecting your lifestyle
- Lower risk: An investor fears investing a lump sum amount, as it exposes him to greater capital risk. SIP investments in India are spread over time, therefore reducing the risk of capital and helping you navigate the market volatility better
- Convenience: Unlike many complex investments, investing in SIPs is hassle-free. SIP investments can be made online, with a one-time set of instructions. Once you start, your SIPs will automatically begin accumulating
- Wide choice of schemes: There is a wide choice of schemes in mutual funds you can choose from. You can invest in any of those traits that match your risk profile, financial goals, and investment objectives
- Low investment amount: You can invest in SIP with an amount as low as ₹500 per month
- Diversified investments: SIPs in equity mutual funds allow you to take advantage of investing in various companies and sectors. Therefore your risk spreads across companies, sectors, and market capitalisation
- Inculcates the savings habit: Investing helios inculcates the habit of savings. In SIPs you commit to investing a fixed amount systematically in predetermined periods, therefore inculcating the habit of savings.
What If You Miss Making the Investment on Time?
Investments in SIPs are automatically deducted from your funding account, at the preset amount and date. Therefore you do not have to worry about missing paying the investment on time.
The Takeaway
SIP investments is the key to earning a good return, with lower risks, and a smaller amount of investment. SIPs are a form of passive investment. This is because once you invest your money, you continue to invest in it regardless of how it performs.
SIP is an excellent way of investing for your long-term financial goals such as your children’s higher education, their marriage, your retirement planning, or estate planning. To know better about SIPs, and get clear guidance in your investment plan, you must connect with experts at Vakilsearch.
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