SIP - The all weather investment approach

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.