There has been an exponential rise of investors participating in the share market over the last 5 years. The majority of investors who invest in the stock market invest in mutual funds. In addition, the systematic investment plan (SIP) has become an extremely popular and efficient strategy among investors.
Let us understand what a SIP is and why it is an effective way to invest in mutual funds.
People often complain about not being able to save money. By choosing this SIP route, you get to invest in regular intervals every month, which will automatically translate into savings before you spend your money.
Slowly but steadily, it brings financial discipline and also helps in realizing the returns later.
With SIP, you get to start investing with as little as INR 500 a month. If your earnings are not very high or your savings are low, you can still take advantage of or be a part of the growth of the Indian stock market by choosing to invest in SIP plans in various mutual funds.
One great advantage of investing in SIP plans is that you don’t have to stress about timing the market and investing accordingly. When the stock market is extremely high, with the same amount, you will be allotted lesser shares and vice versa.
So, the averaging works and your portfolio will be well-balanced at the end of the day.
When you invest in a SIP, the monthly returns derived from the SIP will be reinvested in your investment amount until maturity.
So, with time your investment amount is exposed to the impact of compounding and helps you with exponential growth.
The majority of the SIPs do not charge any penalty or fine if you want to stop the plan at any point. All you have to do is to go to your Demat account and opt out of the plan.
This is one advantage that traditional investments like Fixed Deposits/Recurring Deposits do not provide.
Sometimes for various reasons, you might not have enough funds in your bank account that can be used for investing in SIP. Don’t worry. SIPs allow you to skip a month without any charges or fines.
You can come back later and keep investing as you did every month, unlike an RD or an FD.
If you got promoted or started realizing more disposable income every month, you can choose to start another SIP plan in different mutual funds that invest in other sectors or industries.
This way, you can start investing your extra money and make a decent return on it.
Another important aspect of investing in the stock market is never letting emotions take over your investment decisions. The stock market, by principle, fluctuates continuously.
Do not make any impulsive decisions based on the point performance of the market. This is another area where SIPs make a lot of difference. By bringing discipline into the investment approach, you can help yourself not react to the short-term volatility of the markets.
People who had invested in mutual funds 15 years ago are now reaping big rewards. Let’s have a look at some examples.
Let’s say you started a SIP of ₹3000 per month in HDFC Top 200 (see more details of this mutual fund here) in 1999. In a 15-year period, you would have spent a total of around ₹5.4 lakh. At the same time, your investment would be worth almost a whopping ₹35 lakh!
Let’s take the same SIP amount in Franklin India Prima Plus (see more details of this mutual fund here). Again, you would have spent a total of ₹5.4 lakh. Your investment’s worth in 15 years would be nearly ₹31 lakh!
Systematic investment plans or SIPs shield you from many harms. Some of them are short-term risks, short-term volatility, emotional and impulsive reactions, overspending, and so on.
SIP plans are one of the safest and most convenient ways to invest in the equity markets of India through mutual funds. Learn more about SIP here. It is no surprise then to see the number of people opting to invest using SIP plans increase so much.
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Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.