It is not just called 'The Smart Investor's Choice'
So what is a SIP exactly?
Let's deal with the concept, word by word.
Systematic - the word means regularity. It could be daily, monthly, bi-annually or annually.
Investment - setting aside a certain sum of money to purchase financial instruments which provide returns
Plan - a step-by-step approach towards building wealth to fulfil a certain goal.
Now that you know what the individual terms mean, let's learn about the concept of SIP.
A Systematic Investment Plan refers to regular, timely investment in a mutual fund scheme that could help build wealth in the long term.
It is a common myth amongst investors that mutual fund investments require a huge sum. But it is false. An investor who has a sum as small as Rs. 1000 can also invest in a mutual fund, through the Systematic Investment Plan.
Some features of SIP that stand out are:
- Multiple SIP - Investor can have any number of SIPs as per individual's capacity of investing
- Flexibility - One can close SIP any time as per convenience. For this simple communication has to be made to Mutual fund company
- Duration of SIP - SIP can be of any duration. One can also choose perpetual SIP, where one can invest on a periodic basis till communication to stop investment by the investor to mutual fund house
- Periodic Investing - Investor can choose different periods varying from - Daily, weekly, bimonthly or monthly. However as per market data 95% of investors have done SIP with monthly contributions.
- No relation to return - SIP is a mode of investment and by virtue, has no relation to the return
The benefits of investing in mutual funds through a SIP are as follows:
- Small amount of investing
Investors can start invest in a mutual fund with as less as Rs. 1,000 and thereafter, keep investing regularly
- Rupee cost averaging
Rupee cost averaging is a process wherein the mutual funds units bought are averaged out with respect to market fluctuations. This means that when the prices fall, more number of units are bought and when the prices rise, lesser. This helps average out the results over the long term.
- No need to time the market
You don't need to constantly track or time the market as that is done by experienced fund managers
- Auto debit facilities
Mutual Fund houses allow you to instruct an auto debit so that you don't have to issue cheques every month towards the investment
- Instils discipline
Any investment habit in life requires discipline and a SIP helps inculcate that, through small but regular instalments
A systematic Investment Plan is designed to make you dwell in the habit of regular investment and help be your investment watchdog.
How to SIP your way to wealth
A Systematic Investment Plan is not just abbreviated as SIP for literal purposes - a sip in isolation means a small step towards finishing a task. So that step-by-step, the task gets completed. This feature flows to the Systematic Investment Plan (SIP).
When you decide to invest in a SIP, you set aside a particular amount to be invested at regular intervals. These regular investments help purchase units of a mutual fund scheme - more units when the markets fall and fewer units when the markets rise, thus offsetting the overall risk of the market. This process is called Rupee Cost Averaging.
But would this be applicable if the time period is short? No. Because markets tend to be volatile over intervals and to ride this volatility, you must stay invested through such intervals. And hence, you must hold your SIP for the long term; say 8-10 years for SIPs in equity oriented mutual funds.
There is another reason why you must hold your SIP for the long term.
When you start a SIP, you earn interest. Over time, your SIP works in such a way that the interest on your investment earns additional interest. This process is called Compounding. But again, this requires a long holding period too.
Compounding is a force that could help you multiply your money, if held for the long term.
So now you know - investing via SIP can actually help you sip your way to wealth!