What is SIP and Why is it Beneficial For You

introduction: In India, generally, 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 important selling points is that you can invest in mutual funds with as little as Rs 500 through systematic investment plans or SIPs. It would help if you first understand what a SIP is and why it is beneficial to you.

What is SIP?

SIP stands for Systematic Investment Plan. As the name suggests, SIP is an organized methodology for investing money. When you choose to invest your money through SIP option, you invest a specific amount at a frequency as decided by you. The frequency can be monthly, quarterly, semi-annually, annually and so on. And the amount decided by you is directly deducted from your account and deposited in the mutual fund scheme chosen by you for your investment.

What are the features of SIP?

A fixed amount is debited from your bank account and directly invested in your chosen investment plan at a frequency set by you.

You are allotted a specific number of units based on the current Net Asset Value (NAV).

With every additional amount you invest towards the investment plan, 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 if your money is invested well then your wealth is magnified. And more importantly, timely investment is essential to streamline your savings and spending habits in general. The SIP investment method provides this benefit which awakens the investment disciple in your life by regular investing practice on an ongoing basis.

curb market volatility

Mutual funds follow a risk aversion strategy by investing in a diversified portfolio. SIP investing is a great way to deal with market volatility. You are allocated fewer units if the market falls, and vice versa, when the market rises. But as an investor in a SIP investment plan, the average unit price you pay in the long run is largely less than the higher returns you get.

sheer convenience

SIPs are like a child’s play – very easy to operate. This is one of their most important advantages. SIPs work by directly deducting money from your bank account and investing it in your selected scheme. This ‘No-Invest-Participant’ operation method is ideal if you are generally busy and looking for a regular, smooth and hassle-free investment methodology. In SIP investing, you do not need to keep a constant tab on the frequency and you want to invest on a continuous basis.

compounding profit

Compounding means to earn by reinvesting the principal amount along with profit in an investment scheme. Timely investment through SIP provides you this benefit of compounding. Ideally, you should start investing early and invest for a long period of time to reap maximum benefits.

diversified portfolio

Buying some stocks can be expensive. Mutual funds reduce this factor for you as they offer investment units of a diversified portfolio in a low budget. This means that you can own a portion of highly valued stocks even with a small investment budget. SIPs take this advantage a notch higher. In SIP investing, you can invest in high priced stocks and enjoy the help of a diversified portfolio with investment amount that is only 10% of the minimum mutual fund investment amount.

No additional entry or exit fees

The benefits that come with SIP investment are significant. But you do not need to pay any additional entry fee to avail these benefits of the SIP method in mutual fund investments. Similarly, if you want to close out of SIP mutual fund investment plan, you can do so easily without any additional penalties or exit charges.

flexible budget

A SIP allows you to start investing even if your investment amount is small. If you want to invest in Mutual Funds through the SIP method, then you do not necessarily need a large surplus lump sum amount. Usually, you can start mutual fund investment with Rs 5000, but if you choose to finance through SIP option then you can start with Rs 500. Which makes SIP investment suitable for investors of different budgets.

Having said that, investing in mutual funds through a lump sum amount also has its advantages. Click here to read a comparative analysis of Investing in Mutual Funds through SIP vs Lump sum.

Conclusion

A clear understanding of your financial goals, your risk profile and your time horizon is a must to make an accurate investment decision, whether you choose to invest through the SIP method or not. An important advantage of SIP investing is to ensure that you do not default on payments. If you are still in doubt of going for Mutual Fund SIP investment, then ‘Mutual Fund SIP investing is worth it’ will help you with more clarity to take your final decision.

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