Investing in mutual funds using a systematic investment plan or SIP has become very popular. To know why it is such an effective method to invest in mutual funds, read on!
In this article
- What is Systematic Investment Plan or SIP?
- Advantages of SIP:
- 1. You Can Stop the SIP Anytime
- 2. You Can Skip SIP Payment
- 3. You Can Start a New SIP If You Have More Money
- 4. You Become More Disciplined in Your Savings
- 5. You Can Invest Very Small Amounts
- 6. You Do Not Need to Worry About Timing the Market
- 7. You Benefit From the Effect of Compounding
- 8. You Keep Emotions at Bay
- 9. Past Performance
What is Systematic Investment Plan or SIP?
Systematic Investment Plan or SIP is a method of investing money in mutual funds. The other way to invest is lump sum or one time payment.
In SIP, you invest a fixed amount of money in a mutual fund of your choice every month. The set up is such that the money is automatically debited from your bank account. To know what amount of monthly SIP you need to invest to achieve a certain money goal, use our SIP calculator.
There are numerous advantages to investing your money in mutual funds using SIP.
Advantages of SIP:
1. You Can Stop the SIP Anytime
There is no fine if you decide to stop an SIP plan. If you want to stop it, you simply have to opt out of the SIP plan. This has a very big advantage over recurring deposits (RD) which usually put a fine on you if you want to stop it. After stopping your regular SIP investment, you can choose to get back the amount or let it continue to be invested in the mutual fund.
2. You Can Skip SIP Payment
If for some reason you don’t have enough balance in your account for the SIP investment of a certain month, you can still continue with the SIP next month without any problems. No fine or charges will be levied against you. In the case of RD, there will most likely be a fine for missing a payment.
3. You Can Start a New SIP If You Have More Money
If you start earning more or if you are able to save more, you can always start a new SIP plan in the same mutual fund or a different mutual fund. That way, the extra money will also be invested for the future!
4. You Become More Disciplined in Your Savings
It is a common complaint of many people that they aren’t able to save money. The truth is, the more you earn, the more you spend. This is why you should save first and then spend. If you fix your date of SIP investment right after the date you receive your income, you invest before spending!
5. You Can Invest Very Small Amounts
With SIP plans, you can start investing in mutual funds with an amount as little as ₹500 a month. Here are the best mutual funds to start SIP investment with ₹500. Even if your savings are not very large, you can still take advantage of the growth being experienced by India by investing in mutual funds!
6. You Do Not Need to Worry About Timing the Market
You must have heard that you shouldn’t invest in an inflated market. When you invest using a SIP plan, you do not need to worry about timing your investment at all. At times when the markets are high, your monthly SIP buys you less number of units of a mutual fund. When the markets are low, the same monthly SIP amount buys you more units. Therefore in the long term, you do not pay very high prices for any unit of a mutual fund. This is called the rupee cost averaging.
7. You Benefit From the Effect of Compounding
When you invest using an SIP plan, your monthly SIP investment gives returns. Those returns are added to your actual investment amount and invested again! So over time, your continuous monthly SIP and the returns earned by them is subjected to a compounding effect that ensures exponential growth.
8. You Keep Emotions at Bay
While investing, you should keep emotions away. In the short term, the markets fluctuate considerably. Seeing such ups and downs, you might feel like making impulsive purchases or sales. This is usually not a good idea. You should remain invested for a long period of time. By investing in SIP plans, you follow a disciplined approach to investing. Because of the regular habit of investing in an SIP plan, you prevent yourself from reacting to short term volatility.
9. Past Performance
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 had 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.