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Have you ever wondered how SIP works?
If you are a long-term investor who has been using the traditional method of investing through lump sump investments, it might be time to rethink your strategy.
With systematic investment plan (SIP), you can invest small amounts on a regular basis with the same ease as making an installment payment on your credit card.
This is one way that investors can help themselves build wealth over time and make sure that they don’t have any missed opportunities due to cash flow issues or other constraints.
The goal of SIPs is to take advantage of long-term capital growth by investing a fixed amount at regular intervals over time. This article will discuss how this investment plan can be used and what the benefits are.
What is SIP Investment (Systematic Investment Plan)
A systematic Investment Plan or SIP is a scheme through which you invest money in any kind of security, mutual fund or index in regular interval and systematic manner. SIPs are mainly based on mutual funds & stocks.
Investing money through SIPs is a good idea. It helps you build your portfolio and it eliminates the requirement of monitoring its progress at regular intervals.
While choosing an SIP, you select a time frame for your investment (e.g., monthly, quarterly, etc.) and a particular asset class (e.g., equity mutual fund, debt mutual fund, gold ETF or a stock index) on which you will invest.
You decide the amount of money that you want to invest in the security and then buy units of that security after putting this money into your SIP account. If your investment is done with a systematized approach, it can be very beneficial for an investor.
By utilizing the power of compounding, SIP lets you reap better returns than if you were to invest on your own in a security or an index. This is because it helps you avoid market timing and emotions related to investment decisions.
While investing through systematic investment plans, you do not incur any kind of brokerage and there are no additional fees charged on your investment. You also need not watch the markets on a regular basis as you can continue with your systematic investing plan for an extended period of time.
SIP not only makes investing convenient but also help in building small wealth over time. You can start investing in SIP with as low as INR 500 per month.
How SIP works
SIP lets you invest small amounts on a regular basis (monthly or quarterly depending on the scheme). You can choose to invest a fixed amount or a percentage of your total investment amount.
Since the SIP is for a long period, it is possible that in some periods you will invest more and in other times less because of various factors like market conditions, cash flow etc. On average though, your contributions should add up to the intended investment amount.
SIP investments are made on a day when the mutual fund NAV (Net Asset Value) is determined. In case you invest via cheque then the money will be debited from your bank account and credits to the MF unit holder’s account on this date (same as for redeeming units). If you have invested in cash mode, then your cash will be credited to the MF unit holder’s account and the units will get debited from the fund house.
Subsequently, at regular intervals (monthly or quarterly), a sum equivalent to ‘your monthly SIP amount’ is transferred to the mutual fund account by your bank on your behalf.
For example: If you have invested Rs 1500 in a mutual fund scheme of ABC via SIP mode then your bank will credit Rs 1500 to the MF unit holder account on the date when NAV is determined.
How to invest in SIPs
There are several places from where you can invest through SIPs including banks, mutual funds or directly with stock exchanges.
The most common method used by investors is to open a Demat Account online using one of the many online portals to buy units of various securities.
Some banks also provide the facility to invest in SIP plans through them and also issue an interest on your investment amount. Banks charge a small fee for this, but it is much lower than what other mutual fund companies or stock brokers would charge.
While choosing your investment amount, do make sure that it is enough to carry out transactions at regular intervals, especially if you have opted for monthly SIP investments.
Benefits of Systematic Investment Plan (SIP)
Let us now look at the main benefits of SIP investments:
1) Time in your favor:
The biggest advantage that comes from investing with SIPs is improved returns due to compounding effect. When you invest a lot of money all at once, not only do you have to pay high brokerage fees, but are also more likely to take impulsive investing decisions which could prove costly.
In case of SIP investments, you do not have to worry about market fluctuations or whether the market is going up or down as you can continue with your investment program for a long time and watch it grow gradually.
2) Automation of Investing:
Because of its systematic nature, SIP investments help you automate your investment decisions and reduce the need to monitor them on a regular basis.
3) Minimizes Impact of Market Volatility:
Another advantage that comes with SIP investments is that you are able to make the most out of any market fluctuations resulting from the policy intervention by the government or other factors which influence prices.
In case of lump sum investment, if you invest during a bearish market, you will have to wait for the next upward trend to begin earning profits.
4) Less Risk of Losing Money:
If you are not ready to put in a lot of money in one go, then SIP investments are the way to go as it helps you minimize the risks associated with losing money.
You don’t have to worry about market volatility as well as the fact that you have to pay less brokerage fees for each transaction. Furthermore, these investments give you a tax advantage as well and help you earn long-term returns which can be passed on to your future generation as well.
5) Regular Investment:
It is the core benefit of SIP. The investor saves from being greedy. He/she makes a regular investment, in small amounts instead of investing once or twice in their life to make big money.
6) Risk Management:
Investing on systematic basis reduces the risk of large losses as compared with lump-sum investing.
The investor buys the fixed number of units every month. A diversified portfolio can be created by investing in various sectors (NIFTY 50, MIDCAP, CRISIL index mutual funds etc.)
SIPs are easy to handle. You choose the stock, the amount, and the frequency of investments on a website or brokerage account; then you set it and forget it.
It requires minimal intervention from your side – simply deposit a fixed amount into this recurring order. Your chosen stock is purchased every month in your SIP.
A systematic investment plan is a simple way to save money for the future. It’s easy to set up, and you can take control of your money by investing in things that will grow over time.
SIP investments are a boon for investors as not only do they help you achieve long-term returns, but also helps you save on charges and taxes.
It is an excellent investment vehicle that offers lots of flexibility and enables you to minimize the risks involved with investing in stocks or mutual funds.
It is crucial to invest from a young age so that you can reap the benefits of long-term investments on a regular basis.
What are your thoughts on SIPs and investing for the long-term?