SIP (Systematic investment plans) it’s the word you come across every day, in newspapers, online, TV Ads, hoardings, conversations with friends and colleagues. Systematic Investment Plan or SIP is a method of investing money in mutual funds. In SIP, you invest a fixed amount of money in a mutual fund of your choice every month. The set-up is such that the money is automatically debited from your bank account. A SIP is a small step to your bigger dreams. SIP is a smart way to invest in mutual funds, by investing a small amount every month, which gradually becomes a big corpus, helping you achieve your financial goals. SIP is a periodic investment in a mutual fund for a fixed time frame, which has the potential to earn higher returns.
SIPs have recently very popular owing to AMFIs Mutual Funds Sahi Hai campaign to promote mutual funds as great investment tools to build wealth.
So, here are some of the reasons that make SIPs a must-have in an individual’s portfolio:
SIPs Inculcates financial discipline
The first reason and main reason for investing in SIP are that it makes the investor financially disciplined as the avenue demands regular investing of a fixed sum over some pre-determined tenure. The amount committed towards the SIP scheme need not be large and in some cases has even lowered to Rs. 100 to 500 for a month.
There is also the provision to step-up your investment in SIP as and when your fund flow increases and you wish to reach your financial goals in all likelihood. So, without being influenced by the market conditions, SIP forces an investment from your side. You can decide for the auto-debit of your SIP amount at a date just after your salary date such that you don’t end up spending before investing.
SIPs help grow wealth with the power of compounding
We all learn compound interest from school? You earn interest on not just the principal amount, but also on any other interest earned i.e. interest on interest too! What’s more, the longer your money stays invested, the more it can multiply, and with returns from mutual funds, your money gets opportunities to multiply at even higher rates. Check out the illustration below:
SIP Amount: Rs. 5,000
|
SIP Duration (Years)
|
Total Invested
|
Returns
|
|||
|
4%
|
8%
|
12%*
|
15%
|
||
|
3
|
Rs. 1,80,000
|
Rs. 1,91,544
|
Rs. 2,04,029
|
Rs. 2,17,538
|
Rs. 2,28,397
|
|
5
|
Rs. 3,00,000
|
Rs. 3,32,600
|
Rs. 3,69,834
|
Rs. 4,12,432
|
Rs. 4,48,408
|
|
7
|
Rs. 4,20,000
|
Rs. 4,85,383
|
Rs. 5,64,304
|
Rs. 6,59,895
|
Rs. 7,44,841
|
|
10
|
Rs. 6,00,000
|
Rs. 7,38,703
|
Rs. 9,20,828
|
Rs. 11,61,695
|
Rs. 13,93,286
|
SIPs are lighter on your wallet
You don’t need a lot of money to start a SIP, you can start with as little as Rs. 1,000 a month (or in some cases, even Rs. 500 or 100 depending on the fund). That’s probably how much you might spend on a movie and other things. It’s easy to invest Rs. 500 or Rs. 1000 a month, and the best way to do it, is to invest it before you spend on leisure. When you get your paycheck, set aside what you need for routine expenses, invest, even save some, and then splurge to your heart’s content.
SIPs allow you to average out investment costs
Mutual funds invest in the markets, and the markets are a volatile place to be in. However, by investing regularly through a SIP, you can average out the costs of investing, buying more units when the NAV of your fund is low and fewer units when the NAV of the fund is high. This is known as rupee cost averaging, and this makes any time a good time to invest as it minimizes your exposure to market fluctuation.
Here’s how it works:
|
SIP Date
|
SIP Amount (Rs.)
|
NAV (Rs.)
|
Number of Units
(SIP Amount/ NAV)* |
Average Cost*
(Total cost/ number of units) |
|
Total
|
15,000
|
1255.827
|
||
|
03/01/2018
|
5000
|
12.00
|
416.667
|
12.00
|
|
03/02/2018
|
5000
|
13.00
|
384.615
|
|
|
03/03/2018
|
5000
|
11.00
|
454.545
|
SIPs help you reach your goal systematically
Regularly investing sums in mutual funds coupled with compounding can do. Use that knowledge to set a goal, for example, earn Rs. 5,00,000 in 5 years to buy a car, calculate your SIP amount, and start a SIP to reach that goal. This way, you know how much you need to invest for each goal, and can plan for it systematically. What’s more, when you know you’re investing regularly for your goals through a SIP, you can still do other things you’d like to, without it burning a hole in your pocket. Read about goal-based investing here.