The stock market is unstable, so the Systematic Investment Plan (SIP) is a reliable option. With SIP, investors get to make profits from the ups and downs in the market without facing the stress of timing. SIP is a disciplined approach, as it includes investing specific amounts at regular intervals and offers protection from the volatility in the market. SIP is highly embraced by Indian mutual fund investors and is considered the perfect entry point for long-term investments.
Understanding Systematic Investment Plan (SIP)
A systematic investment plan is an approach towards investing and includes distributing specific amounts for investment at regular intervals in the market.
SIP stands as a highly preferred way of investing in mutual funds and stocks as it offers investors a chance to participate in the market and manage risk efficiently.
How Does SIP Work?
A systematic investment plan works on the two major principles. They are:
Rupee Cost Averaging
Systematic investment plans help you avoid market volatility by removing the uncertainty of market performance. Constant investing ensures that the average purchase cost remains relatively consistent over time.
If the market rises, you avail fewer units, and if the market falls, you get more units. This reduces your risk and makes sure that you get investments at a lesser average cost per unit.
Compounding
Saving small amounts of money constantly for longer periods might have a great impact on your investment due to the effect of compounding. Refer to the example given below to illustrate this principle:
‘K’ begins investing at the age of 40 for his 60th birthday
Considering a return of 7% and Rs. 1000 monthly investment, his entire corpus at the completion of 20 years will be a total of Rs. 5,28,000
A begins investing at the age of 20 for his 60th birthday
Considering a return of 7% and Rs. 1000 monthly investment, his complete corpus, which is a completion of 40 years, will be Rs.26,56,463, which is five times the amount accumulated by ‘K.’
Making regular investments over a longer time results in greater profits and returns.
Key Features of SIP Investment
Some of the key features of SIP investment plans include the following:
Unrestricted Investment Ceiling: With an investment of Rs.100 in SIP without any upper limit restriction, investors get to contribute the amount of their choice throughout the SIP. This results in consistency of SIP investment throughout the entire duration of the plan for the best results.
Halting Investments Temporarily: In SIP, investors are offered the convenience of suspending their investments temporarily, providing flexibility, especially during challenging financial situations. However, your SIP is resumed automatically when the pause period comes to an end. Investors must verify the availability of this pause service with their mutual fund providers.
Long-Term Income Creation: SIP investments are crafted for long-term investment generation. Through disciplined and consistent contributions, combined with compounding, investors get to achieve satisfactory returns over a long period, which can also be estimated beforehand with the SIP calculator. With this long-term approach, the financial goals of investors, such as building a corpus or retirement plan, align well.
Benefits of SIP Investment
A SIP investor explores the following benefits:
- SIP provides flexibility to investors as they stop, start, increase, or decrease their investments anytime they want to achieve their financial goals.
- As SIP investment involves investing fixed amounts at specific intervals, it helps investors to invest in a disciplined manner. Moreover, it results in long-term income generation over time.
- SIP is a cost-effective investment because investors get to invest in mutual funds, even with small amounts. Hence, investing in mutual funds through SIP is less costly than other methods of investment.
Final Thoughts!
A systematic investment plan is a well-structured investing approach in mutual funds, helping investors to create wealth over long periods. SIP investments are a good option for investors who believe in regular investments with small amounts. The popularity of SIP investment has increased among Indian mutual fund investors as it promotes disciplined investing with the absence of market volatility. It is essential to invest in the long term in order to get optimal results through this investment plan. A mutual fund investor must believe in starting early and investing regularly.