Start small and earn big: A breakdown of SIP
If you don’t want to invest your money in one lump sum for whatever reason and you have a low risk appetite to boot, you can choose to invest in SIP: systematic investment plan.
It’s basically just a way to invest your money in a regular and organized manner by investing a monthly sum, similar to how you would invest in a recurring deposit (RD) with your bank. The difference is that the money is invested in mutual funds instead of being sent into an RD and, as such, your investment is market-linked.
Investing in a SIP requires discipline and systematic approach, which is good for new investors to establish the habit of saving a small amount every month and investing it over a long period of time.
A fixed amount of money that you have decided to invest will be debited from your account on a monthly basis to be invested in the SIP of your choice for a tenure of your choosing. You can also choose to do a lump sum, one-time investment, though we don’t advise it.
Thanks to the digital age we live in, investing in a SIP couldn’t be simpler; the best SIP plans let you do everything from KYC to setting up your auto-debit for your payments from the convenience of your own home.
There are a few solid reasons as to why you should invest in SIP over a fixed deposit or an RD.
- Low entry point: Since you’re investing in regular intervals, months, you get to break up the investment amount into a more manageable sum which reduces any financial pressure that you might feel. You can start a SIP with as little as Rs. 500 per month.
- Rupee-cost averaging: Remember how we said it’s not ideal to invest in a SIP with a lump sum? The reason why is rupee-cost averaging. Committing a fixed amount of money towards your investment means that you get to buy fewer units in a mutual fund when the market is high and buy more units when the market is low. Not only does this inculcate discipline but it also means that the average cost of your investment works out lower.
- Mitigation of market volatility: With a SIP, rather than focusing on the right time to exit or enter the market, you can focus more on time in the market. Given that you invest in the right mutual fund and the right scheme within it, studies have demonstrated time and time again that equity mutual funds outperform every other asset class in the long term, and are an effective way to counter inflation.
- Compounding benefit: Without making it too complicated, another perk of making regular investments in smaller sums is that your money is compounded easily. If you’re following the right methods, even investing a small amount of money, like Rs. 1000, in the long term, like 20 years, with a modest interest rate, you could still save as much as Rs. 15 lakh.
Like with all investments, investing in SIPs is best done to meet long term financial goals rather than to make a quick buck in the short term. Markets are incredibly volatile at the best of times and this volatility can only be negated by investing over a long period of time. We cannot stress enough the importance of choosing the right plan or mutual fund to invest in as well since this is key to seeing good returns. Thanks to online resources, finding out the best mutual funds for SIP is relatively easy.
However, should all these things be taken into account when you invest, we see no reason why you wouldn’t achieve your financial goals, whatever that may be.