What is Systematic Investment Plan and its benefits?
March 03, 2019
While many people in India now want to invest, the plethora of investment options often makes the selection difficult for the investors. Add the complicated technical jargons to this overflow of options and most investors prefer sticking to their traditional investment options.
If you too have tried to search on the internet, one option that you might have frequently come across is SIP. What is SIP? Is it for a particular type of investor? What are its benefits? Let us find answers to these questions and know a little more about SIP to make an informed investment decision.
Basics of SIP
SIP full form is Systematic Investment Plan. In simple words, it is a mode of investing money in mutual fund schemes managed by AMCs (Asset Management Companies). Rather than investing a lump sum amount, SIP allows you to invest as little as Rs. 500 periodically in a mutual fund scheme of your choice.
The SIP amount will be auto-debited from your bank account on a date selected by you. Apart from this convenience, SIP is also known to offer many other benefits.
Advantages of SIP
1. Low investment amount
One of the most significant benefits of SIP investment is the lowest amount that you require to start a SIP. As mentioned above, you can start investing in SIP with just Rs. 500 per month. Compare it with other popular investment options, and you'll see that SIP has the lowest entry barrier in terms of money.
It also ensures that you can begin your investment journey from an early age and achieve your financial objectives sooner.
2. Rupee cost averaging
The next valuable benefit is RCA or Rupee Cost Averaging. As you’ll be investing a fixed amount every month, there is no need for you to worry about the market condition. With SIP in mutual fund, you will receive more units if the NAV or Net Asset Value of the fund is low and fewer units if the NAV is high.
In the long run, the cost generally averages itself and proves highly beneficial for the investor irrespective of the volatility.
3. Power of compounding
When you select a mutual fund scheme for SIP, you'll mostly get two options - growth and dividend. If you go with the dividend option, you'll receive gains from the plan periodically as per your investment amount. However, if you go with the growth option, your dividends would be re-invested in the fund to help you offer the compounding benefit.
If you are investing in SIP plans for a long duration like 20 years, this power of compounding can significantly increase the returns.
4. Disciplined investing
For many investors, starting investment is easy but regularly contributing to it is not. By routinely investing a fixed amount in the scheme of your choice, Systematic Investment Plan automatically makes you a disciplined investor.
This improved discipline acquired from SIP can also be beneficial with all of your other investments.
SIP for each of your financial goals
The simplicity and flexibility of SIP with excellent returns potential have made it a go-to option for modern investors. Moreover, with so many different types of mutual fund schemes now available, it is now easy to pick a plan as per your profile.
So, irrespective of what your investment objective is, understand how mutual funds and SIPs work to take the first step in the right direction.
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