MUTUAL FUND
What is SIP?
A Systematic Investment Plan (or SIP) is an investment mode through which you can invest in mutual funds. As the term indicates, it is a systematic method of investing fixed amounts of money periodically. This can be monthly, quarterly or semi-annually etc. When you invest steadily in this manner, it can become easier to meet your financial goals.
How does SIP work
When you invest through a SIP, you invest a fixed sum of money in a given period. This amount lets you purchase a certain number of fund units. If you continue to do this for a long time, you get to invest in the fund during the highs and lows. In other words, you don’t need to time the market to make your investments. Market timing can be a risky proposition as one can invest at the wrong time. SIP investments remove this factor of unpredictability.
Having decided on the investment tenure and frequency, you can choose to automate your investments. Give a standing instruction to your bank to transfer the amount directly from your bank account into the mutual fund SIP of your choice, on a fixed date every month (or quarter) etc..
Benefits of Investing in SIP
1) Power of compounding
Compounding occurs when the returns you earn on your investments start earning returns. This is a simple concept in theory. But its practical implications are substantial.
When you invest regularly through SIPs, your returns get reinvested. Over time, this result in a snowball-effect, that may increase your potential returns manifold. An ideal way to maximise this gain is to invest for an extended period. This also means you may benefit by investing as early as possible.
Even a ten-year head-start can have a major impact on your returns. Here’s an example to illustrate the point.
Imagine there are four investors: Varun, Gita, Henry and Mira.
Varun - 20 years
Gita - 30 years
Henry - 40 years and
Mira - 50 years
All of them invest Rs. 2,000 per month in an equity fund through SIPs.
Assuming the equity fund offers an annual return of 12%, here’s how much each one could earn by the time they turn 60:
This table clearly shows the exponential nature of SIP returns. Here, Henry's overall investment (Rs. 4.8 lakh) is exactly half of Varun’s investment (Rs. 9.6 lakh). However, his wealth creation is way behind that of Varun’s. Therefore, the earlier you start investing, the higher chance that you could grow your final corpus.
2) Low initial investment
You can invest in mutual funds through a SIP with just Rs. 500 per month. This can be an affordable way to invest each month without hurting your wallet. You can increase your monthly investment amount with a rise in your income via SIP step-up feature. Mutual fund houses allow investors to top up their SIPs on a regular basis. So, even if you start with Rs. 500 or Rs. 1,000 every month, you can invest more over the years. This strategy can help you reach your investment goals at a faster rate.
3) Rupee cost averaging
Rupee cost averaging is a concept where you purchase more units when the Net Asset Value (NAV) of the fund is low, and lesser units when the NAV is high. Essentially, it averages out your purchasing costs over the tenure of the investment period. You don’t need to worry about how to time the market when you invest through a SIP.
4) Convenience
SIP can be a convenient mode of investing. Like most investors, you may not have the time for extensive market research and analysis to adjust or balance your portfolio. So, once you pick a good fund, you can give standing instructions to the bank and let the SIP take care of your monthly investments.