Systematic Investment Plan (SIP) is a disciplined way of investing, where you invest fixed amounts at a regular frequency (say, every month or quarter). It is bit by bit systematic investment. For example, you commit to invest a pre-specified amount (Rs 500 onwards) every month in a mutual fund. You fix a date on which every month the amount gets invested. The first investment has to be by a cheque and then you can opt for electronic clearing system (ECS).
SIP is an option through which the investor can decide to invest a fixed amount on a monthly basis for a fixed period in the scheme(s) of his choice. SIP in an equity fund acts as a tool to create wealth in the long-term.
There are several advantages of opting for an SIP in an equity fund
- Allows the investor to invest even a small fixed sum of money at regular intervals
- It reduces risk by making volatility work in investor’s favour
- It provides the benefit of rupee cost averaging — investors gets more units at low NAV and vice-versa
- Power of compounding allows small amounts to grow into a significant amount in due course of time
- Imparts time tested discipline to investing and helps to manage anxiety caused by dips in the market.
It is very simple to operate an SIP — after the initial account opening it can work automatically through a standing instruction. Investors should not make the mistake of closing the SIP during a bear phase in the market. Markets are cyclical and during a bear phase the investor is able to get more number of units as he is able to buy low. SIP in 3 – 4 equity funds should be able to give the investor the necessary diversification.
The advantages that MFs offer include professional management, affordability, liquidity and convenience. Besides, they are well regulated, transparent and tax efficient. Having invested in a MF scheme, the investor need not track the Net Asset Value (NAV) or performance on a daily basis.
Power of Compounding
SIP helps you to start investing at an early age to meet the greater expenses of your life. Saving a small sum of money regularly makes money work with greater power of compounding with significant impact on wealth accumulation.
Rupee Cost Averaging
SIP minimizes the effects of investing in volatile markets. It helps you average out your cost by generating superior returns in the long run. It reduces the risk associated with lump sum investments. Since, you get more units when the NAV drops and fewer when it rises, the cost averages out over time. Thus, the average cost of your investment is often reduced.
Convenience and Regularity
SIP gives you the convenience to pay through Axis Bank Electronic Clearance Service (ECS) or Auto Debit. You can decide the amount and the mutual fund scheme. A fixed amount will automatically get debited from your account on a date specified by you.
Disciplined approach towards investment
Since you invest regularly, it makes you disciplined in your savings, which leads to wealth accumulation. Disciplined investing is vital to earning good returns over a longer time frame.