What is SIP in mutual funds?
Systematic Investment Plan (SIP) is a method of investment in mutual fund plans. With a SIP, you can invest a fixed amount of money regularly over a period in a fund of your choice. Investing in SIP ensures long-term returns. Since the amount invested is subject to compound interest, it enhances your profit margins. SIP investments are made at regular intervals so the market risks are significantly reduced.
Here are five reasons why you should opt to invest in Systematic Investment Plans-
- Financial discipline
You can invest a pre-determined amount of money on a weekly/monthly/yearly basis depending on your preference and convenience if you opt for SIP. The chosen amount is automatically debited from the investor’s linked account and put into a mutual fund scheme. Each time the amount is debited from the account, extra units of the scheme are purchased and added to the investor’s mutual fund account. SIPs are ideal savings instruments because they offer great returns and help investors inculcate a habit of saving for the future.
- Multiplication of wealth through compounding
Investing in Systematic Investment Plans is not restricted to high-income investors alone. You can invest an amount as less as Rs.500 every month. Compounding is the method of earning interest by reinvesting the previously earned interest. Thus, you can turn a minimal amount of money invested into a large corpus through compounding. Simply put, SIP helps your wealth grow faster. This is one of the major benefits of SIP.
- Low risk of market volatility
The stock market and volatility go hand-in-hand. Investing in equity funds means you need to keep a check on the market dynamics constantly. Sometimes the stock prices may drop, or the conditions may become unfavourable, which may compel you to exit the market before maturity. Timing the market to maximize profit can be difficult. On the other hand, SIP overcomes the need to time the market with the aim of gaining higher profits. Thus, the risk of market volatility is very less.
- Accumulation of fund units
When investing in a SIP, the date and amount are fixed. Depending on the Net Asset Value (NAV) of the mutual fund’s assets on the day you start investing, you receive a certain number of units. Over the term of your investment, you accumulate units. On the day that you term expires, you receive your returns which essentially is your total units multiplied by NAV.
- Flexibility
Systematic Investment Plans are flexible as compared to other mutual fund instruments. The investor can choose the period and amount of the investment. Moreover, you can decrease or increase the instalment amount depending on your current financial situation. The investor can continue to invest or choose to opt out of the SIP plan as per their need and preference. This makes the plan more convenient for individuals.
Keeping in mind the above benefits of SIP, it is the best method to enter in the mutual fund space.
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