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A Systematic Investment Plan (SIP) is a disciplined way of investing in Mutual Funds. It is basically setting up investments in a mutual fund scheme at a fixed frequency ( daily, monthly, quarterly, half yearly or annually) on a fixed date with a fixed amount for a fixed period. SIP is a very good way to ensure regular saving. You can start investing in an SIP with an amount as low as ₹500. It lowers the cost of investment and allows the capital to appreciate over the long-term.
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Benefits of SIP
An SIP offers a higher degree of investment competitiveness to the mutual fund investors by generating returns and regular income, besides providing several other benefits.
Rupee Cost Averaging
The equity markets witness ups and downs and so as the stock prices from time to time. An SIP follows a smart move of purchasing a higher number of units at a lower price during the bear run of the market. And when the market rebounds, a lower number of units are purchased at a higher price, thereby creating an equilibrium of its own. This practice, which is known as rupee-cost averaging, leads to a fall in the average cost of an investment.
Example– Suppose you are investing Rs.10,000.In a month when the NAV is Rs.20, you will be allotted 500 units because 10000/20 = 500. However, in a month when the NAV is Rs.16, you will get allotted 625 units, as 10000/16 = 625. Over the tenure of the SIP, you average out the cost of the units accumulated.
Another reason SIP makes sense is that overrides the psychological instinct to stop investments when the market falls down or not able to maintain the discipline.
Economy of Investment
An SIP does not pinch the pocket much as one can do so by paying ₹500 on a monthly basis.
Scope for Inflation-adjusted Returns
An SIP allows an individual to sail smoothly by providing the benefits of inflation-adjusted returns.
Ease of Investment
SIP has to be set up once and then rest of the process takes care of itself.
Disclaimer – Mutual Funds are subject to market risks. Please read the scheme related documents carefully before investing.