Why SIP is the Ideal Investment Strategy

The popularity of Systematic Investment Plans (SIPs) has gone up immensely in the last few years.

So much so that it has changed the way mutual funds operate! Earlier, mutual funds used to plan for increased and decreased investing during the market based on market cycles.

Now, thanks to SIP, the inflow into mutual funds is far more consistent!

How SIP is ideal for an investor?

Here are some compelling reasons for investors to consider SIP as a mode of investment in the stock market.

1. Minimizing Risk

SIP is a tested method of minimizing risk while going for investing in equities.

During volatile market situations such as the one we saw in 2018, SIP becomes a blessing in disguise for a common investor.

More units of the subscribed funds or stocks can be purchased at the corrected or lower price.

Hence, investors get their units at a lower average cost and therefore higher returns when the market situation improves after a period of time.

2. Benefits of Compounding

When you invest through SIP mode, your monthly SIP investment gives returns. Those returns are effectively added to your actual investment amount and invested again.

So, over the period of time, your continuous monthly SIP and the returns earned by them are subjected to a compounding effect that ensures exponential growth of your wealth.

Hence, SIP has a compounding effect on your investments.

It ensures that an investor can enjoy good returns, through regular, periodic investment, over a long horizon.

A small amount of investment as low as ₹1000 per month can swell up into a huge corpus over a longer period say 10 years.

3. Rupee Cost Averaging

The obvious benefit of SIP is that it helps investors average the rupee cost of a unit and thereby helps them earn higher returns on equity in the long run.

When the market is volatile, timing the market is a difficult task.

Rupee Cost Averaging is an investment strategy that eliminates the need to time the market.

When you invest a fixed amount in a fund or stock at a regular interval over a period of time, you fetch more units when the price is lower and lesser units when the price is high.

So, you would reduce your average cost per unit over time.

You may also want to read Why is rupee cost averaging important?

4. Disciplined Investing

SIP also helps an investor invest in a disciplined manner irrespective of the current market conditions.

SIPs enforce financial discipline to the investors without any effort.

5. Affordability

SIPs are affordable because you can start investing with an amount as low as ₹100 per month in mutual funds.

6. Flexibility

You can easily discontinue the SIP at any point in time.

But it is always advisable to continue SIP investments with a long-term perspective to gain handsome returns but obviously, there is no such compulsion.