SYSTEMATIC INVESTMENT PLANS (SIP)
What is SIP?
SIPs are the best example of “slow and steady wins the race.” As it is the method for investing in Mutual Funds scheme where you contribute a fixed amount on a regular basis, usually monthly. This approach helps in accumulating wealth over time and encourages a disciplined saving habit.
Why to Invest in SIP?
- Helps Manage Market Volatility: By investing regularly through SIPs, you invest across different market cycles. This spreads your risk over time and helps mitigate the impact of short-term market volatility, providing a smoother investment journey.
- Professional Management: Mutual funds are managed by experienced fund managers who make informed investment decisions on your behalf, ensuring your money is invested wisely.
- Diversification: Investing in mutual funds through SIPs allows you to diversify your investments across various asset classes, sectors, and geographies, reducing overall risk.
- Disciplined Savings: SIPs encourage regular, consistent saving habits, helping you build wealth systematically over time.
Using an example to better understand SIP
Let’s consider an example where you invest ₹2,000 every month in a mutual fund through SIP for a period of 6 months. The Net Asset Value (NAV) of the mutual fund changes each month. Here’s a simplified tabular representation:
Month | Investment (Rs) | NAV (Rs) | Units Purchased | Total Units |
1 | 2000 | 20 | 100 | 100 |
2 | 2000 | 22 | 90 | 100+90 = 190 |
3 | 2000 | 18 | 110 | 190+110 = 300
|
4 | 2000 | 24 | 80 | 300+80 = 380 |
5 | 2000 | 21 | 95 | 380+95 = 475 |
6 | 2000 | 19 | 105 | 475+105 = 580 |
How Does SIP Work?
- Choose Predetermined Amount and Interval
- Decide on the amount you want to invest and the frequency (e.g., monthly, quarterly).
- Auto-Debited from Your Account
- The chosen amount is automatically debited from your bank account on the specified date.
- Invest in a Specified Mutual Fund Scheme
- The debited amount is invested in the mutual fund scheme you have selected.
- Allocated a Certain Number of Units
- Based on the prevailing Net Asset Value (NAV) of the fund, you are allocated a certain number of units.
- Advantages of Power of Compounding and Rupee Cost Averaging
- Rupee Cost Averaging: You buy more units when prices are low and fewer units when prices are high, averaging out the purchase cost over time.
- Power of Compounding: As your earnings are reinvested, your investment grows exponentially over time.
Additional Points:
- You can choose the investment amount, frequency (monthly, quarterly, etc.), and duration (number of years) for your SIP.
- SIPs are suitable for both new and experienced investors.
- Different types of mutual funds (equity, debt, hybrid) are available for SIP investment, allowing you to match your risk appetite and investment goals.
Remember: SIP is a long-term investment strategy. Consistency is key to reaping the benefits. Therefore, SIPs offer a practical, disciplined approach for investing in mutual funds. With their numerous benefits, including affordability, flexibility, and the potential for wealth accumulation, SIPs are a smart choice for both new and seasoned investors. Whether you are saving for a specific goal or planning for long-term financial security, SIPs can be a valuable tool in your investment portfolio. Kickstart your SIP journey today and witness your wealth blossom over time! Start planting the seeds of financial growth and watch as they flourish into a robust future!