Markets may go up or down. You may have spotted an
opportunity to buy but needed time to take decision / arrange funds and execute
the deal finally. Many people are not conscious about the time they take to
make an investment. Both are volatilities that affect an investment decision
whether to put money or withdraw/repurchase. By choosing the SIP route, one can
arrest both volatilities and more:
SIP- what it is?
A Systematic
Investment Plan (SIP), more popularly known as SIP, is a facility offered by
mutual funds to the investors to invest in a disciplined manner. SIP facility
allows an investor to invest a fixed amount of money at pre-defined intervals
in the selected mutual fund scheme. The fixed amount of money can be as low as
Rs. 500, while the pre-defined SIP intervals can be on a
weekly/monthly/quarterly/semi-annually or annual basis. By taking the SIP route
to investments, the investor invests in a time-bound manner without worrying
about the market dynamics and stands to benefit in the long-term due to average
costing and power of compounding.
At times when the markets are high, your monthly SIP buys
you less number of units of a mutual fund. When the markets are low,
the same monthly SIP amount buys you more units. Therefore in the long term,
you do not pay very high prices for any unit of a mutual fund.
SIP Vs. FDs
Both SIP and lump-sum investments allow investors to benefit
from potential wealth creation through mutual funds. However, the primary
difference between SIP and lumpsum methods is the frequency of investment.
SIPs
allow you to pump in money into a mutual fund scheme periodically, such as
daily, weekly, monthly, quarterly or half-yearly etc. On the other hand,
lump-sum investments are a one-time bulk investment in a particular scheme. The
minimum investment amount also varies. You can begin investing in SIPs with as
little as Rs.500 per month while generally lump-sum investments need at least
Rs.1,000.
If you are looking for ways to begin investing, Systematic Investment Plan or SIP in mutual funds can be the way to go. But how does it help you? Why to invest in SIP?
1.
Small Investment Amount
With SIPs,
most mutual fund schemes allow you to start investing with as little as Rs. 500
per month. This investment amount is considerably lower than the most popular
investment options.
This
ensures that even people in their 20s who have recently started working can
start investing to meet their future goals.
2.
Adjust the SIP Amount the Way
You Want
SIPs are
highly flexible. For instance, if you start a Rs. 1,000 SIP in a mutual fund
scheme of your choice, there is no necessity to keep on investing only Rs.
1,000.
If your
savings increase in the future, you have the option to increase the SIP amount
or even start a new SIP in the same mutual fund scheme or any other scheme of
your choice.
3.
Stop or Skip the SIP
Moreover,
there is no need to compulsorily make the SIP investment every month for
any fixed duration. You can skip the SIP for a few months or even stop the
investment as and when you like.
So, in
case of an emergency, if you do not have adequate funds to invest, you can skip
SIP payments for a few months.
4.
Makes You a Disciplined
Investor
The next
important reason why SIP is best is its
ability to make you a disciplined investor. Most investors start investing but
fail when it comes to investing regularly. Regular investments are necessary to
get closer to your financial objectives.
The very
nature of SIPs is as such, that it adds more discipline to your investment
journey. An amount fixed by you automatically gets invested in the scheme of
your choice, eliminating the need for you to make the monthly investments
yourself.
5.
Timing the Market- What is
That?
It is
almost impossible to time the markets on a consistent basis accurately. But
SIPs don't require you to time the markets in any way.
You keep
on investing a fixed amount month after month irrespective of the market
conditions. You will get more fund units if the market is down and fewer units
if the markets are high.
6.
Reduces the Average Cost of
Mutual Fund Units
Continuing
from the point above, SIPs also help in reducing the average cost at which you buy
the mutual fund units. The NAV of the fund is low when the markets are
falling and high when the markets outperform.
So, in the
long run, when you keep investing a fixed amount through SIP, the average cost
of purchasing the units tend to be on the lower side as compared to making a
lump sum investment when the markets are running high.
7.
Power of Compounding
If you
select the growth option at the time of starting your SIP, the returns that
your investment generates would then be added again to your investment amount.
This results in the compounding effect, which could generate excellent returns
in the long run.
So, if you
have long-term financial goals, starting a SIP in any scheme of your choice and
selecting the growth option can prove rewarding.
8.
No Emotional Investing
It can be
challenging for an investor not to get swayed by the ups and downs of the
market. The volatility of the market often encourages people to make emotional
investment decisions that generally fail to deliver expected results.
But the
working of SIPs protects the investors from making such mistakes. All you need
to do is to keep investing a fixed amount every month without worrying about
the short-term market volatility.
9.
Complete Transparency
The mutual
fund industry has grown by leaps and bounds in India in the last few years. To
protect the interest of the investors, AMFI and SEBI have introduced several
stringent measures that every mutual fund scheme and AMC now needs to follow.
This has
made the mutual fund industry transparent and safe for investors who are just
starting their investment journey through SIPs.
10.
Online Portfolio Tracking
Most top
AMCs in India now let investors manage their mutual fund investment online. Once you start a SIP,
you will receive a user ID and password with the help of which you can access
your account any time you like.
You can
track your SIP, switch to a different scheme, stop SIP, start a new SIP, and
even redeem the units from the comforts of your home.
11.
You Can Start a New SIP If You Have More Money
If you start earning more or if you are able to save
more, you can always start a new SIP plan in the same mutual fund or a
different mutual fund. That way, the extra money will also be invested for the
future!
12.
Have horses for courses.
Save separately for each financial needs and protect one
need from merging into another and leave unfulfilled. You can use the 4 bucket
approach to tackle this easily. Initially start with Bogle’s law that says one
to invest 100-age as an allocation rule of thumb for equity and balance into
debt.
Always take advise from a MFD/RIA. Mutual Fund
Investments are risky. Past performance is not guarantee of future performance.
Read all offer related information before investing.
