A Systematic Investment Plan (SIP) is an investment option where you invest a pre-determined amount on a specific date in a particular mutual fund scheme. This is the commonest investment option used by retail investors to maximise their benefits.
There are several benefits of investing in an SIP, particularly because it helps you make the most out of all market conditions. SIP is especially useful for salaried persons who are able to save and invest a certain amount regularly; however, the benefits of SIPs apply to all investors.
The key to making money in SIP investment plans, like in any other financial instrument, is to identify a good performer. There are multiple equity schemes that have delivered high returns over a long period of time. SIPs dealing in such equity schemes generally outperform the market and are considered to be the best SIP plans to earn higher returns in the long term.
Here are three major benefits of investing in SIPs
- SIP helps in nullifying the effect of market correction
When investing directly in equity, you have to time your buy and sell orders accurately to earn higher returns. This is difficult even for seasoned investors and you may never be able to time the market correctly. Furthermore, these are single payments and if the equity market crashes, you may suffer huge losses. On the other hand, with an SIP, these losses are minimised to a great extent.
Through SIP you buy the mutual fund units at periodic intervals. This enables you to buy more units when the market dips. Furthermore, the number of units purchased when prices increase is lower. On the whole, when you calculate the average cost of the mutual fund units, it will be much lower than the highest price of the unit. This is because you have been buying a varying number of units at every stage of the price cycle.
However, this holds true only if the mutual fund you have chosen is performing well. If you start an SIP when the market is high and starts falling sharply, shortly after you began investing, you may suffer from capital losses.
- Lesser financial pressure on investor while investing through SIP
SIP is all about small but regular investments. You may start an SIP with as little as INR 500 per month and build wealth over the years. These regular small amounts of investments become sizable fortunes, over longer periods of time with the compounding effect. And the small investment ticket size does not affect your routine financial commitments.
Assume you invested INR 500 per month, a relatively small and expendable amount of monthly income in an equity mutual fund scheme for a period of 10 years. Your total investment of INR 60,000 at a 20 percent annualised return will grow your investment by 6-7 times. As a result, you will be able to earn a maturity amount of INR 3.6 lakh to INR 4.2 lakh.
In the current market, where even fixed deposits (FD) earn a meager rate of interest, SIP investment plans are able to earn you a significantly higher return. These higher earnings are possible without blocking huge amounts of finances.
- Ideal for busy people and those who are new to investment
Typically, any kind of investment requires a lot of research and due diligence before you actually invest in the instrument. However, majority of the people either do not have the time to research or do not know how to do so. SIP is the ideal instrument for such people as the risk involved is very low. You only have to invest a small amount every month, in mutual funds, that by principle already have diversified the risk. These schemes are professionally managed by experienced fund managers. This is beneficial in mitigating the risk of volatility that is inherent to any kind of equity investment.
With technical development, you do not have to visit any physical branch or office. You may easily learn how to invest in SIPs through online banking. Furthermore, you are easily able to research and analyse the performance history of the respective schemes enabling you to make an informed decision.
In addition to being hassle-free, an SIP is a tension-free investment instrument. You do not have to worry about the ups and downs of the stock market or time your investment decisions accordingly. You may simply set up the specified date on which the SIP investment should be debited from your bank account and then leave the rest to the mutual fund managers.
Start an SIP today and see your capital grow over the years.