A SIP is a way of investing in mutual funds. It enables you to invest a fixed sum in a mutual fund plan at regular intervals that you can pick.
Invest in SIP lets you choose from an automatic contribution process by which a fixed amount fixed sum gets deducted from your savings account on a daily or monthly or quarterly or half-yearly basis and is directed towards the preferred mutual fund plan.
How does it work?
SIP works on the simple model of consistency of investments. They work like recurring investment of a stipulated amount, which gets deducted directly from an investor’s bank account at fixed intervals.
Once the investor does SIP, the mutual fund house apportions you with a certain number of units of the plan you have decided to invest in, depending upon the plan’s Net Asset Value (NAV) for the day. With every SIP payment, the investor gets additional units of the plan.
Since every time the plan units are purchased at different rates, hence, with the same SIP amount invested at regular intervals, your money gets you fixed units of the mutual fund plan during rising and falling of markets.
Hence, a SIP allows you to lower the average cost of your investment and decrease the risk of your investment by distributing your purchase price over time. This is known as rupee cost averaging.
Additionally, if you invest in SIP, it allows you to constantly increase your investment amount by a fixed amount and get the advantage of compounding as you earn returns produced from your investment. This is called the power of compounding.
Advantages of SIP
Small amount required: A SIP lets investors start off investing in mutual funds with an amount as low as INR 500. Thus, the SIP mode of investment is easy on the pocket of investors. Additionally, the low investment condition reduces the financial threat linked with lump sum investments.
Compunding power: When you invest in a SIP, an investor increases your investment by a specific amount at regular and fixed intervals. By maintaining the returns invested along with the principal amount, an investor gets returns om investments also under the SIP mode of investment. It is known as the power of compounding.
Low risk: Mutual funds invest in equity and debt investment tools which are unstable due to stock market and economic changes. Thus, with the same money, an investor purchases fewer units of a mutual fund when the market is bullish and more during bearish markets. Thus, SIP allows an investor to decrease the average cost of his or her investment and the risk associated with it by spreading the purchase price over time. This model is known as rupee cost averaging.
Automatic process: An investor can go for an automatic SIP deduction. For this, you need to give a one-time directive to your bank for making your SIP payments, and your money gets invested in the scheme automatically at the periodic interval picked by you. This saves you from the hassle of filling forms and doing unnecessary documentation and issuing cheques or logging on digital platforms every time you make a SIP contribution.
The best SIP to invest in, depends on the market situations and to lower your risk it is best to seek the advice from a reputed wealth manager.
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