When investing in a mutual fund, you can choose between two types of investments:
a) Investing all your money in one go
b) Investing smaller amounts over a longer period.
The latter is also known as Systematic Investment Plans or SIP plans. Both approaches have advantages and disadvantages. This information can be valuable, especially for a new investor.
People like to invest in mutual funds on a regular and consistent basis. However, a few key considerations need to be kept in mind. The following sections will also examine a few primary advantages of SIP investment.
SIP Investment Benefits
Most people who invest in SIP make their investments every month on a specified date. It is important to remember the NAV (Net Asset Value) of units. In a mutual fund, these units fluctuate daily.
As a result, the number of units you purchase through a SIP transaction will also fluctuate daily. In the following section, we’ll discuss the advantages of SIP investment, all of which are made possible by the feature mentioned above.
1. Rupee Cost Averaging
“Rupee cost averaging” refers to a type of investing practice. Here, more fund units are purchased when the fund’s Net Asset Value (NAV) is low. Also, fewer units are purchased when the NAV of the fund is high.
Investors can better protect their wealth because the cost of buying units in a mutual fund is spread out in the SIP. When you invest in SIP, you don’t need to worry about the right time to enter or exit the market.
2. Unique Power of Compounding
The term ‘compounding’ refers to the process by which the gains from your investments earn additional gains. When you regularly invest in SIP, you can reinvest any profits you make.
This has a snowball effect. In the future, gains will be even greater than before. You can maximise the return on your investments by committing them to various financial vehicles for an extended period. This is the other advantage of SIP investment. It enables you to start investing at a younger age.
3. Controlling Your SIP Investment Amount
You can invest in mutual funds with as little as Rs. 500 per month. This type of investment is preferable to a lump sum. Implementing this strategy for investing money each month won’t put undue stress on your finances.
Since the SIP investment includes a ‘step-up’ feature, it allows you to put away more money every month. You can invest your money in as many SIPs or mutual funds as you see fit. The SIP investment strategy can help people get closer to their financial goals more quickly.
4. Make Your SIP Investment Work
One of the numerous advantages of a SIP is that it is simple to configure. This is only one of its many advantages. Money is put aside consistently via a SIP investment. You don’t have to worry too much about timing the market or doing much research.
Choose a solid fund and instruct your financial institution to deduct the monthly SIP amount. This is done from your account automatically. You can ensure that you will never pass up an opportunity to put your money to work. This is a great way to make your money work for you.
5. Financial self-control
The objective of a SIP plan is to invest a predetermined sum of money at regular intervals. Typically, once a month in a mutual fund of your choice.
This accomplishes two goals for you:
a) First, it gets you into the habit of saving money.
b) Secondly, it puts you in a good position to make your money grow over time.
Also, keeping it in a market-linked investment might beat inflation.
Both of these goals are important for your financial future. You won’t find many other investments that can provide this. You will receive returns greater than the inflation rate. This is the best part of SIP Investments as mutual funds. This is something you can’t get with a lot of other investments.
6. Returns on SIP investments
You can choose the period during which you want to invest. This is another advantage of SIP investment. Before purchasing mutual funds, you might be required to make at least six payments to your SIP.
On the other hand, there are no time constraints placed on investors. This is a great advantage of consistent payments to a fund. You can reuse your profits for another SIP investment. If you have multiple SIP investments going at the same time, you will have greater returns. Most people have two to three SIP plans running at the same time. This allows them to have multiple small investments with large returns after a few years.
An Important Reminder
Some organisations portray SIP investments as safe investment plans. This eliminates market risk by delivering above-average returns. Please remember that SIP investments are not risk-free from market volatility. It is something you need to keep in mind at all times.
As stated earlier, an SIP is a method of making gradual mutual fund investments. If you acquire units when the market is falling, the value of those units will decrease if the market continues to fall. This is the main premise behind this strategy.
Investing in a systematic investment plan (SIP) is an effective strategy. This is great for achieving your long-term financial objectives. You will also be generating returns superior to the inflation rate.
This is due to the various advantages that SIP investment has. When selecting a plan for a mutual fund, you should also contact financial experts who can guide you professionally to better gains. To read related blogs, head to the Piramal Finance website right away.