Systematic Investment Plan
Systematic Investment Plan or SIP is an instrument that allows regular, small investments in a mutual fund scheme. With SIP, a fixed amount is deducted from the investor's bank account periodically and gets invested in the mutual fund of their choice.
How does SIP in mutual funds work?
The journey of SIP starts with choosing a mutual fund scheme. After which, a predetermined fixed sum will be invested periodically towards the fund scheme. This amount lets the investor purchase a certain number of units of the fund.
Investing in SIP over a long period helps you invest even during the highs and lows of the market. One does not need to monitor the market for the same regularly. Hence, SIP removes the unpredictability factor of stock markets.
Also, after setting the regular payment limit, frequency and tenure, one can give standalone instructions to their bank for direct payments from the bank account into the mutual fund scheme.
Benefits of investing in SIP mutual funds
Compounding Effect:
Compounding is a process that takes place when the returns on investment start gaining returns. It might seem simple in words but have a substantial effect over time. Investing in SIP helps the investor take advantage of the power of compounding since the returns on investment are reinvested. Hence, it is necessary to stay invested through SIP to gain the maximum benefits, which have a manifold effect. Also, to gain these benefits for a long period, it is beneficial to start investing early.
Minimal initial investment:
The investment in mutual funds through SIP lets one start with a very minimal amount of Rs. 500 or Rs. 1000 every month. Though, this can be increased with time with the help of step-up or top-up SIPs. Top-up SIP lets you increase the number of payments over the years to reach the goals early.
Rupee cost averaging:
Under the rupee cost averaging, more units of a fund are purchased when the NAV of the fund is low and fewer units of the fund are purchased when the NAV of the fund is high. It averages out the cost of the fund over the tenure of the scheme. It eliminates the need to time the market for making investments.
Convenience:
SIPs are a convenient mode of investing as the monthly payments are directly deducted from the bank account of the investor. The investors who do not have the time to conduct regular market research and invest accordingly have to find a good fund and start the SIP that will take care of the periodic investments.