SIP - What is it and how does it work?
What is SIP?
The full form of SIP is Systematic Investment Plan. It is an investment option which provides a structured way to invest regularly in mutual funds by contributing a fixed amount monthly, quarterly, annually etc rather than making a one time investment (lump sum).
Why are SIPs a popular investment strategy?
SIPs enable investors to take exposure to mutual funds in a disciplined manner. Irrespective of the market volatility when the contribution amount is the same at a regular frequency then the investors benefit from something called rupee/unit cost averaging. As the investors keep investing the same amount at regular intervals, they buy more mutual fund units when the market is low and fewer units when the market is high. As a result, the overall cost per unit of investment comes down over time.
Is SIP safe?
SIPs are not immune to market risks. Unit cost averaging does not assure profit, nor does it protect one against investment losses in declining markets. It only ensures disciplined & regular investment in mutual funds without involving the hassle of timing the investments. Hence, investors have to remember that returns on investments are not guaranteed.
How do SIPs work?
SIPs are periodic investments made at consistent intervals where the investment amount is automatically taken out from the investor’s bank account and is invested in the mutual fund.
Post this, the investor gets a certain number of mutual fund units. The number of mutual fund units the investor gets is dependent on the Net Asset Value (NAV) of that particular fund.
Hence, with every new investment installment the number of units the investor gets increases. This helps investors build a large investment corpus in the long run. When starting the investment journey with SIPs, “how to invest in SIPs” is the fundamental question most folks will have. SIPs are a feature that is available across multiple distributor platforms. The advent of such digital platforms that provide a user-friendly interface along with the UPI feature has simplified the SIP investment process.
Advantages of investing in SIPs:
1. Compounding: Compounding is a financial occurrence that makes time work in the investor’s favour. When the investment earnings are added to the principal, a larger base is formed on which earnings may accumulate. SIPs help in taking advantage of this occurrence. As money gets consistently invested over a period of time, there is enough space for the corpus to accumulate to become a meaningful sum of money.
2. Ease of Investing: SIPs provide an ability to start with small amounts of money. Even if investors may earn a significant amount of money, investing in small ticket sizes help them start early and stay invested for a long period of time.
3. Enforces discipline and Consistency: Investing in mutual funds regularly through SIPs inculcates a habit. Irrespective of market downturns, staying invested requires patience and discipline that may be rewarding in the long run.
4. Flexibility of Cancellation: SIPs have the flexibility to terminate the plan at any time. This gives investors control over their investment decisions.
When to invest in SIPs?
- Early Age: Investing as early as possible helps since it provides enough time for the investments to weather market conditions. Hence, this provides investors ample time for the investments to grow and take full advantage of the power of compounding.
- Stable Source of Income: It's important to have a stable source of income before starting an investment journey either through SIPs or Lumpsum. Earning enough money is important before putting that money to work.
- Financial Goals: Having clear financial goals helps in deciding the time periods for which the investor has to do SIPs. For retirement goals it helps to do an SIP for a longer time horizon. This ensures effective wealth accumulation to meet the financial goal objectives.
Conclusion:
The growing size of SIPs and the number of SIP investors showcase the mutual fund industry’s efforts to inculcate the habit of disciplined investing. The entire process of investing via SIPs is a great way to start especially for beginners. They can start small and have the option to eventually step up their investments with time. It helps in taking a very disciplined approach to investing instead of making lump sum investments that may require investors to time the market.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Please note that this article or document has been prepared based on internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
