What is SIP?
SIP or a Systematic Investment Plan is an automated investment option created with the intention of getting more returns. SIP automatically deducts a pre-decided amount from your bank and invests in mutual funds periodically. Money in SIP is invested weekly, monthly, quarterly, half-yearly and annually. So, depending on the duration the customer selects, the money gets deducted. Since the investments in this plan are planned way in advance, they get better returns and regular returns.
How does SIP function?
SIP works on the basic functionality of regular investments. Once the SIP amount has been debited from the account, the investor will purchase certain unit of assets with the amount. After purchasing those units, a Net Asset Value (NAV) is allotted to you for the day. With every SIP the investor purchases more units of the assets. Keep in mind that SIP amount is fixed and does not change every time.
Depending on the market condition, the investor purchases more units if the market is rising and fewer units if the market is declining. The investor then makes the allocation of the assets accordingly. This act of balancing the asset rates depending on the market condition and reducing the risk of the investment is called Rupee Cost Averaging.
How can you start SIP investment?
Before you start SIP investment, have a clear goal and learn the entire process. Here are a few pointers that you need to remember.
Have a financial goal – Ensure you set a goal that is easy on your pocket and won’t lead to the building of debt. You can always start off with a small amount.
Tenure – Have a clear goal as to when you would need the money, would you want a short term investment or a long term investment.
Monetary goal – A SIP calculator lets you achieve your financial goal after you put in the desired amount.
Benefits of starting SIP:
Compounding feature – Since SIP invests money over a period of time. A good amount of asset gets accumulated. The longer the assets are invested, the higher will be the returns.
Rupee Cost Averaging – SIP investment doesn’t get affected by the volatility of the market. As the assets are locked in for a longer duration. When the market is weak, fewer units are purchased, and when the market is strong, more units are purchased. This balances out the average rupee cost.
Regular Savings – SIP is the best way to encourage people to make investments. The best part of this investment scheme is that you get to select the frequency and desired amount.
Flexible – Investors can invest money for as long as they desire. They can keep investing until they want to keep the money and discontinue at any point of time. The pre-decided amount can also be changed over a period of time.
Long-term gain – Because of the compounding benefits and rupee cost averaging, investors get good returns on their plans.
SIP is one of the best methods to make a disciplined investment. Plus it gets regular and good returns, SIP is extremely popular among the working youth and continues to be so.