SIP - SYSTEMATIC INVESTMENT PLAN is the best alternative for Bank RD and which gives better returns than RD. But the popularity of Systematic Investment Plans has gone up in the last few years and thanks to demonetisation, many individuals discovered the charm of SIP and mutual funds. Amfi's Mutual Fund Sahi Hai campaign also helped popularising the concept of SIP and mutual funds.
A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.
How does it work?
A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme.You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding. Rupee-Cost Averaging
With volatile markets, most investors remain skeptical about the best time to invest and try to ‘time’ their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high. During volatile period, it may allow you to achieve a lower average cost per unit.
However, many investors, including those who have already made SIP investments in mutual funds, are often confused about SIPs.
Many investors think that an SIP is a product. It is not uncommon to come across a query - can I invest in an SIP to achieve my goal? An SIP and mutual fund schemes are not synonyms. An SIP is a mere tool that helps you to invest regularly in a mutual funds.
To clear our Jaguars regarding SIP, we have to know “Power of Compounding”
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it.” The rule for compounding is simple - the sooner you start investing, the more time your money has to grow.
Example
If you started investing Rs. 10000 a month at your 30 years of age, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 7% a year, it would be worth Rs. 52.4 lakhs when you reach 50.
However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 7%, you would have Rs. 1.22 Cr on your 50 th birthday – more than double the amount you would have received if you had started ten years later!
This is the power of compounding generates good returns and accumulates best figures in your wallets.
Other Benefits of Systematic Investment Plans:
Disciplined Saving – Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives.
· Flexibility – While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.
· Long-Term Gains – Due to rupee-cost averaging and the power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.
· Convenience – SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account.
SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments.
To overcome the fear of Mutual funds, start your small monthly investment in SIPs for atleast three years of locking period, definitely you will get good returns and confidence to increase your investment.
Any queries / suggestions, please comments below.
Hello, welcome to my blog, Smart Investor. I'm Satyanarayana, a banker & blogger, Investor from Visakha -patnam, India. You can read more about SML here.
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