What is an SIP and Why is it Beneficial for You

Introduction:

In India, typically, Mutual Funds are fast becoming a convenient way to invest your hard savings. They come with a string of benefits that appeal to the diverse investor population. And one of its most significant selling points is that you can invest in a Mutual Fund with as little as Rs 500 through systematic investment plans or SIPs. It would help if you first understood what a SIP is and why it is beneficial for you.

What is SIP?

SIP stands for Systematic Investment Plan. As the name suggests, SIP is an organised methodology for investing money. When you choose to invest your money through the SIP option, you invest a particular amount of money on a frequency decided by you. The frequency could be monthly, quarterly, semi-annually, annually and so on. And the amount you decide gets deducted directly from your account and credited to the Mutual Fund scheme you have chosen for your investment.

What are the features of SIP?

1. A fixed amount is debited from your bank account and directly invested in your chosen investment scheme on the fixed frequency predefined by you.
2. A specific number of units are allocated to you based on the existing Net Asset Value (NAV).
3. With every additional amount invested by you towards the investment scheme, a proportionate number of Mutual Fund units are added to your investment account.

What are the benefits of SIP for you?

Disciplined Investment

Investments act like a second income and grow your wealth if your money is invested well. And more importantly, timely investments are necessary to streamline your saving and spending habits in general. SIP investment method offers this benefit that inculcates investment disciple in your life by regular investing practice on an ongoing basis.

Curbs Market Volatility

Mutual Funds follow a risk aversion strategy by investing in diversified portfolios. SIP investment is an excellent way to deal with market volatility. You get more units if the market drops, and inversely, when the market rises, you are allotted fewer units. But as an investor in a SIP Investment Scheme, the average unit price you pay for in the long run is broadly lower against the high returns you enjoy.

Sheer Convenience

SIPs are like a child's play – very easy to operate. That is one of their most significant benefits. SIPs work by directly deducting money from your bank account and invest it in your selected scheme. This 'no-investor involvement' operation method is ideal if you are usually busy and looking for a regular, smooth and hassle-free investment system. In a SIP investment, you don't have to keep a continuous tab on the frequency and the amount of money you wish to invest on an ongoing basis.

Compounding Benefits

Compounding means earning by reinvesting the profits as well as the principal amount in an investment scheme. Timely investments through SIPs offer this benefit of compounding to you. Ideally, you should start investing early and stay invested for a long duration to reap maximum advantage.

Diversified Portfolio

Some stocks can be expensive to buy. Mutual Funds ease this factor for you as they offer investment units of diversified portfolios in low budgets. That means you can own a part of high valued stocks even with a small investment budget. SIPs take this benefit a notch higher. In a SIP investment, you can invest in high priced stocks and enjoy the help of a diversified portfolio with even investment amounts that are merely 10% of a minimum Mutual Fund investment amount.

No Additional Entry or Exit Charges

The benefits that come with a SIP investment are significant. But you don’t have to pay for any additional entry charges to avail these benefits of a SIP method in a Mutual Fund investment. Similarly, if you want to discontinue from a SIP Mutual Fund investment scheme, you can do so easily without any additional penalties or exit charges to bear.

Flexible Budget

A SIP allows you to start investing even if your investment amount is tiny. You don’t mandatorily need to have a large surplus lump sum of money if you want to invest in a Mutual fund through the SIP method. Usually, you can start Mutual Fund investments with Rs 5000, but you can start with as little as Rs 500 if you choose to finance through the SIP option. That makes SIP investments suitable to investors of varying budgets.

Having said this, investing in Mutual Funds through a lumpsum amount also has its advantages. Click here to read a comparative analysis of investing in a Mutual Fund through SIP versus lumpsum.

Also Read: Why you should use a Systematic Investment Plan (SIP)

Conclusion:

A clear understanding of your financial goals, your risk profile and your time horizon is a must to make accurate investment decisions, irrespective of whether you choose to invest through a SIP method or not. An important benefit of a SIP investment is to ensure that you don’t default on the payments. If you are still doubtful of going for a Mutual Fund SIP Investment, 'Is investing in Mutual Fund SIP worth it will help you with more clarity to make your final decision.