Short for a systematic investment plan, SIP helps you in making small and regular investments in your chosen mutual fund scheme. When activated, a fixed sum of money is deducted from your account monthly to make investments in your preferred scheme. It is quite different from lump sum investments. Here, the investment is spread over time. You do not need a large sum for SIP investment. SIPs help in instilling financial discipline by forcing you to set aside a fixed sum at regular intervals.
Working of SIP
Whenever a certain sum is invested in the mutual funds through SIP, you get fund units that correspond to the money you invested. There is no need to keep a tab on the market timings when making investments through SIP since there are benefits associated with both bearish and bullish trends in the market. This is because when markets are low, the number of purchased units is higher and when the markets are high, fewer units are purchased. The cost of purchase gets averaged out over time due to the regular updating of NAV on the daily basis. This process is known as rupee cost averaging. You miss out on this benefit when you invest in a lump sum amount.
Benefits of SIP Investments
There are several benefits of making investments through SIP in mutual funds. Some of them can be discussed as follows:
- Convenience: SIP offers a disciplined and convenient way of making investments in a phased manner. The investments can start from as low as Rs 500 per month.
- Rupee Cost Averaging: There is no need to time the markets when investing through SIPs. This is because more units are bought when the markets are at a low point.
- Compounding Power: Discover the power of compounding money through investments made over a long period. With the help of rupee cost averaging, SIPs help in ensuring that you have better returns when compared to a lump sum investment.
- Higher returns: With the help of ELSS mutual funds, you get higher returns than most of the bank FDs, PPfs, or other traditional investment instruments.
- Financial Discipline: SIP investments make you financially disciplined in terms of fund management. Automated investments every month save you the hassle of manually investing money every month.
- Emergency fund: SIPs can be stopped at any time with no restrictions from the fund house. Considering there is no lock-in period of your investment, you can even redeem them at any point in time.
Conclusion
SIPs are a great way of investing for any first-time mutual fund investor. It is especially best for people with a fixed source of income like salaries. A small portion of this income can be diverted on a monthly basis through SIP. Not only does it help in instilling a sense of financial discipline, but it also helps in the wealth creation of the investor. If you are looking to start your mutual fund journey through SIPs, you can ask for advice from our financial experts today.
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