Systematic Investment Plan (SIP) is an investment vehicle offered by mutual funds to investors, allowing them to invest using small periodically amounts instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly
One of the best investment plans in recent times, Systematic Investment Plan or SIP provides a wonderful money saving opportunity to someone who started to earn just recently. SIP works on the main principle of making regular investments where you put in a small amount every month, similar to a recurring deposit.
You need to put in a big lump sum (one time investment) amount in order to purchase a mutual fund while SIP allows you to make smaller investments (monthly or quarterly).
For instance, if you are looking to invest in a MF of Rs 10,000 then you can do it in two ways. Either you can buy the MF putting up front the entire amount in form of one time investment or pay 20 periodic investments of Rs 500 each.
However, you must give some time in learning about the concept of rupee cost averaging and compounding principles before getting full on with your SIP.
Earlier, mutual funds could only be accessed by a rich few, only who could produce one time investment to buy them. With introduction of SIP, mutual funds could also be accessed by an average person with a tight budget. It’s doesn’t cost much to invest Rs 500 or Rs 1,000 on a monthly basis in the SIP.
The biggest benefit in making invest in SIP is that it helps you to get into mode of saving. You develop a healthy habit of saving and a monthly SIP of Rs 1000 for example which grows at a rate of 9% can give you around Rs 7 lakh in 10 years.
1. Small Sum is Easy to Arrange:
It’s not difficult to arrange for a small sum from your monthly disposable income for your SIP. Rs 500 or Rs 1000 set aside from your monthly income won’t rattle your monthly budget by much. If you can maintain such a discipline in your investing pattern for at least 10 years, a sizable amount can be raised.
2. Compounding effect:
Starting investing early is a mantra that must be adhered to by each and every youngster. It is due to the fact that benefit of compounding can easily make your savings appear attractive after some time. To put it clearly, let’s learn it through an example.
Person X started investing Rs 10,000 per year at the age of 25. Person Y started investing the same amount every year at the age of 30. Now when they both reached 55 years in age, X had raised a deposit of about Rs 12 lakh and Y had only around Rs 8 lakh. And, this is in the case when rate of return was 8% compounded annually.
So the difference of Rs 50,000 in the total amount invested makes a big difference of more than Rs 4 lakh to their end-corpus and this is all due to compounding effect. So, longer is the compounding period, better are the returns one can avail.
3. Effects of Rupee cost Averaging:
Rupee cost averaging is all about buying more units when the price is lower and vice versa. It’s all about making regular investments in a fund and this is truer when investments are being made into equities. This investment strategy is the best approach to cover market’s ups and downs and cut down on market risks. Similarly, by investing in SIP, you average cost of investing comes down, since, you pass through all kinds of phases (bulls & bears) in the market.
Additionally, there are no entry or exit loads on SIP investments and capital gains (wherever applicable) are taxed as per first-in, first-out basis.