A Systematic Investment Plan, commonly referred to as SIP in the mutual fund industry is an easy and hassle free way to invest in mutual funds. The term SIP has become so synonymous with mutual funds that some people actually confuse SIP for mutual funds. SIP is not mutual funds, it is one of the two ways to invest in mutual funds. Earlier, the only way to invest in mutual funds was by making a one time lump sum investment. Investors had to pay the entire mutual fund investment amount right at the beginning of the investment cycle. The problem with lumpsum investment is that an investor’s entire finances are exposed to the market’s volatile nature right from the beginning. Also one may or may not have a lump sum amount at their disposal to begin investing in mutual funds.
SIP just eases out the entire investment process for aspiring mutual fund investors. All you have to do is complete a one time mandate with your bank after which you can invest in mutual funds at systematic intervals. An individual needs to be KYC compliant in order to start a mutual fund SIP. Through a Systematic Investment Plan, one can invest small amounts every month in a particular mutual fund scheme. One does not need to have a large investment amount in order to invest in mutual funds via SIP. Every month on a fixed date, a predetermined amount is debited from the investor’s savings account and electronically transferred to the mutual fund.
SIP investments are ideal for those looking to achieve long term financial goals or are seeking wealth creation through systematic investing. Here’s how:
SIP investors benefit from compounding
In mutual funds, compounding refers to the interest earned on the interest of the original investment. Apart from earning interest on the initial investment amount, SIP investors continue to gain interest as their gains are reinvested back in the scheme. Over the long term, this might help small investment amounts to multiply and turn into a commendable corpus. However, one can only benefit from compounding if they continue investing in mutual funds via SIP for five years or more.
SIPs are flexible in nature
Although to accumulate wealth through SIP investment one needs to invest systematically, there can be times when one may not have the SIP amount due to some financial emergency. SIP allows investors to skip their SIP in case they do not have the finances to pay that particular month’s investment amount.
Achieve long term goals without having to time the market
Timing the market is almost impossible. Even seasoned investors find it difficult to time the market. With SIP one does not have to worry about investing their money at any specific moment. One can invest in mutual funds via SIP every month without having to time the market. The goal here is to make sure that you continue investing in the long run so that your investments can beat the daily market upheaval and also overcome inflation.
Benefit from rupee cost averaging
SIP investing allows rupee cost averaging. When the NAV is low, more units are allotted to an investor’s mutual fund portfolio. Similarly, when the NAV of a fund is high, lesser units are allotted. This is referred to as rupee cost averaging. Over the long term, rupee cost averaging can lower your investment amount and provide better returns.
Now that you know SIPs are crucial for long term investment, planning to start a mutual fund SIP? You can achieve your long term financial goals through systematic and regular investing. Investors can also take the help of a SIP calculator to understand how much money they need to invest in mutual funds at periodic intervals in order to achieve their long term financial goals.
Mutual fund investments are subject to market risks, read all scheme related documents carefully