What is a SIP and how it is useful for mutual fund investors?
Systematic Investment Plan (SIP) is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund scheme periodically, at fixed intervals – say once a month, instead of making a lump-sum investment.
The SIP installment amount could be as little as Rs 500 per month. SIP is similar to a recurring deposit where you deposit a small fixed amount every month.
SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a bank cheque each time.
SIP has been gaining popularity among Indian MF investors, as it helps in Rupee Cost Averaging and also in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by mutual funds are easily the best way to enter the world of investments over the long term.
SIP is a simpler approach to long term investing is disciplining and committing to a fixed sum for a fixed period and sticking to this schedule regardless of the conditions of the market.
Advantages of mutual fund SIP :
Small amount and big gains
SIPs allow investors to invest small amounts every month. In fact in some mutual fund schemes you can invest an amount as small as Rs 500 a month. This is how small saving can lead to higher returns in the long-term.
Rupee Cost Averaging
Rupee cost averaging is another significant reason why many investors are considering SIP nowadays. Considering a long term investment approach, rupee cost averaging can even out any market ups and downs in the long term, allowing the investor to gain maximum benefits on his or her investments over time. Investing a fixed amount of money every month towards any investment vehicle allows them to purchase more units or stocks when the price of the investment is lower. This reduces the average cost of purchasing of the financial asset over time.
A SIP investor, while investing every month would end up buying more units when markets go down and buying less units when market goes up.
Power of compounding
An investor who starts early is the one who is successful. SIP allows one to invest with a minimal amount so anyone starting off early will be highly benefited than the one starting off with a big amount years later than him, since all investment and returns are based on the power of compounding which helps one earn return over returns.
Investment convenience
SIP allows the advantage of investing in small amount of money each time without any hassle to the investor. The investor can send an one-time instruction know as SIP ECS mandate form to his bank to allow auto debit of the fixed investment amount each month from his bank account without worrying about missing out on any monthly installments.
Discipline
Disciplined approach towards investment helps the investor to keep his emotions in control. Investing in equity mutual funds can be tricky because the stock markets are volatile. Investors tend to shy away from equity because of the ups and downs they witness. But in doing so, they give up on the opportunity to generate high returns over the long-term. Equity has proven to be the best-performing asset class over long period of time, which is when the magic of compounding returns starts to show. But to get the best of this, you need to not only invest regularly but also stay invested.
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