A systematic investment plan (SIP) is a method used to invest in various mutual funds. The investment plan in SIP is simple. You can invest a minimum of INR 500 over a specified period. For instance, every month, every six months, or even every year.
A SIP is a popular investment plan for any age group above 18 years. It is less confusing. Anyone can start with a small amount that goes on to add as time passes. It is as simple as it seems. You invest, and your money starts growing gradually.
A SIP is your best option for anyone looking to invest with financial discipline. In the long run, a SIP can give you good returns. It is a less risky and more secure form of mutual fund investment.
Another fascinating thing about SIP is that you can invest according to your investing need.
Say, every month, you invest 500, but now you want to change it to 1000 – you can easily do it with a SIP. It is this flexible and easy investing option.
Let us see the nitty-gritty of how SIP functions and works. We will also see how a SIP can grow and add value to your investment plan.
How Does a SIP Work?
SIP is a method of investing with a fixed amount in a fixed interval of time, like monthly, quarterly, or yearly. Once you know your customer (KYC) norms are complete, investors must fill in the SIP application form with each mutual fund mandate.
In the form, details like the SIP investor’s plan, amount date, term plan, and net asset value (NAV) are mentioned. After the form is accepted. Initial sip payment is to be made. Only after these steps does investing in a SIP become hassle-free.
One need not worry about market ups and downs. You just need to select a SIP plan with an amount and the term of payment interval. Your investment money will automatically get debited every interval. No worrying about the market, and no worrying about payment due date.
However, if an investor doesn’t want an auto-debit facility from the bank, they can do it through other mediums like postdated cheque facility.
Benefits of Investing in SIP
- Compounding Power
The prime factor of investing in any SIP is the power of compounding. Compounding any small investment amount can also become huge over the period. Because compounding not only gives interest on the principal amount but gives interest on interest earned. With this method, your SIP amount accumulates and grows to achieve your financial goals.
- Financial Discipline
Having a long-term financial goal is important. But it is possible only with proper savings. SIP is a good saving plan for a financially stable future. Always keep in mind that financial discipline is the key to attaining financial goals.
By investing regularly, you are saving and building up your wealth. With the help of a SIP calculator, one can plan their investment accordingly. With financial discipline, your wealth grows.
- Rupee Cost Averaging (RCA)
The term RCA might get hard to understand in SIP investment. But by RCA, it means SIP can help investors avoid market volatility. Your money is secure despite market ups and downs. So, no need to worry – your SIP is risk-free.
The method is simple when the market falls, you get higher units, and when the market rises, you get lesser units. By this, your amount is saved from market volatility.
Here is an Example of How Investing in SIPs Can Create Extra Wealth
Let’s say you are to invest INR 1000 in a SIP mutual fund. And the current NAV for that mutual fund is INR 25. Since the NAV is 25, you will be allotted 40 units of that mutual scheme. (INR 25 x 40 units = 1000).
Now your earning value depends on the NAV. If the NAV becomes higher, say INR 40 next year, your invested amount will rise to INR 1600. This way, your wealth grows and is created over time.
(Moreover, do not forget the compounding effect that you are sure and bound to get in any case whatsoever. In this case, it applies to both principal amounts invested as well as interest earned.)
Other Advantages of SIP
- Investing in SIP is flexible. You can decide whether to increase the amount or decrease the investment with ease. You have control of your investment without any interference.
- Investing in SIP comes with lower financial risk due to market ups and downs. You are comparatively on the safer side while investing in a SIP.
- Start early with a minimum amount. The best part of the SIP is that it requires a very low initial start to invest. Any earning group can invest in a SIP. Low investment and high returns. As simple as that.
- It is best for investing in the long term. Long-term investment in a SIP gives you a higher return and better wealth value. No uncertainty when you age or when you need money the most.
- No anticipating and contemplating the market like how it is done in the share market. Your invested amount is safe and growing.
A SIP is undoubtedly one of the most convenient, easy, and high-value investment plans for the long run. It comes with less risk, high return, a compounding advantage, and an easy auto-debit feature linked to your bank account. Investing in a SIP is like a cakewalk. The next time you think of securing and growing your wealth for the future, think of SIP.
Moreover, we always encourage our readers to visit the Piramal Finance website and blogs for more information on personal finance of such kind. Piramal Finance can become your one-stop solution for all your financial needs.