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 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 is 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, by 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.
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.
SIPs are affordable because you can start investing with an amount as low as ₹100 per month in mutual funds.
You can easily discontinue the SIP at any point of 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.
A systematic investment plan (SIP) is a way of investing money where investors make regular, equal payments into investment instruments like a mutual fund, a trading account or a retirement account.
It is basically a mode of investing your hard-earned money into a financial scheme or instrument.
In an SIP, instead of a lump sum, the investment is done regularly on specific intervals either weekly, monthly or quarterly. The most famous frequency of payment is monthly.
SIP is considered the most efficient and convenient way to invest in the stock markets.
Say if you plan to invest ₹1,20,000 in March 2019 as a lump sum, in a SIP you will invest ₹10,000 per month by dividing your planned lump sum investment into 12 equal parts.
The Bottom Line
A SIP is meant to help you diligently invest your money into one or more mutual funds or stocks over a particular period of time.
Mostly, new investors who know very little about the stock market, consider the option of starting with SIP.
So, what are you waiting for!
Disclaimer: the views expressed here are of the author and not of Groww
Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.