People are talking so much about SIP (Systematic Investment Plan) these days. Everyone wants to invest in SIP. ‘Shukra hai log pehli baar kam se kam sahi investment product ki baat kar rahe hain’.

While, For me SIP is ‘Sabse Important Plan’.

Indisputably, SIP is one of the smartest ways to invest in mutual funds. But before starting a SIP we must understand it, to get most out of it.

Firstly, its important to understand that SIP is not an investment product, as perceived by most of the investors. Rather it’s a mechanism to invest in Mutual Fund schemes.

What is a Systematic Investment Plan?

SIP is an investment vehicle offered by mutual funds to investors. It allows them to invest small amounts periodically instead of big lump sum amounts. The frequency of investment is usually weekly, monthly or quarterly. SIP brings discipline in our investment approach towards building wealth for our future.

Key Benefits of Investing through SIP

Brings Financial Discipline

SIP encourages disciplined investment. A fixed amount of money is debited in investor’s bank account periodically and invested in a mutual fund schemes. The investor gets allocation of units according to the Net asset value (NAV) for that day. Every time a sum is invested, more units are added to the investors account.

SIP is a planned approach towards investments and helps you inculcate the habit of saving.

Achieve Goals Painlessly

SIP gradually helps you to build wealth for your future. You don’t have burden to invest bigger amount in one go to achieve your future financial goals. By starting early we can achieve our financial goals by investing small amount regularly . Thanks to Power of Compounding.

Flexibility

While it is advisable to continue SIP investments with a long-term perspective. However SIP’s are flexible, the investors may stop investing in a plan anytime. Or may choose to increase or decrease the investment amount according to financial need.

Can be started with Small Amount

We can start SIP with small amount as low as Rs. 500 per month. It allows investors of all income levels to get benefit of mutual fund even by investing small amount regularly.

We can anytime increase the investment amount gradually with increase in our income. As the more we invest, the more financial goals we would be able to achieve.

“It doesn’t look like much in the beginning. The power comes in the last 10 years from compounding the money saved in the Previous 20″…Duane Meek

Power of Compounding

As you start accumulating units through SIP and stay invested for long term you start feeling the power of compounding. ‘Investment Timing’ doesn’t matter, what matters is the ‘TIME IN THE INVESTMENT’

Let’s see if you can understand its power…..

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Elbert Einstein has once said “Compounding is the eighth wonder of the world. He, who understands it, earns it… who doesn’t… pays it.”

Eliminates Timing Risk by Rupee Cost Averaging (RCA)

This strategy aims to free the investors from speculating in volatile markets by Rupee cost averaging. Investor gets more units when the price is low and lesser units when the price is high. In the long run, the average cost per unit of overall investment is supposedly gets lower.

Consistent investment will ensure that no opportunity is missed arising out of the market volatility.

 

We will discuss in our next post about ‘SIP Myths’ that investors are having in their mind. It really needs to be busted.