What Is SIP & Why Invest In It?

revrgvegrvegrvInvesting money in the financial sector is one of the most popular ways to earn quickly. With its growing popularity, there arose the need to diversify the modes of investment.

What Is SIP?

The most prominent question a new investor would have in his mind is “What is SIP?” SIP stands for Systematic Investment Plan – in which the buyer invests a fixed amount of money every month. It is an automatic market timing mechanism. To explain this in simpler terms, it forces the buyer to invest in more units when the price is low and in fewer units when the prices soars; thereby, managing the expense of the mutual funds, during highs and lows of the market.

SIP Investments and Where Does It Fit in The Scheme of Things about Mutual Funds.

If you want to create wealth through the capital market with rolling returns, then mutual funds are the best way forward. The following are the benefits of investing in mutual funds:

  • The choice of time horizon is for you to decide. It could be long term or short term
  • Money doesn’t get locked up rather it gets invested in various schemes.
  • You can diversify risk by segregating your investments in either Equity or debt based funds
  • There is a plan or fund type for every goal
  • You can start investing with funds as low as Rs. 500

SIP investments are one of the safest and easiest ways to invest in mutual funds. It fosters a habit of regular and systematic investment. Investing in mutual funds via SIP is akin to investing in banks recurring fixed deposit account, the only difference being mutual funds exposure to unpredictable market as the money is invested in equity or debt schemes as per the investment goals and requirement.

The Craze of Mutual Funds Investment Via SIP Is Here to Stay, And The Long-Term Benefits Outshine Any Other Investments.

The benefits of SIP investments are many. It all comes down to the investment goals, the correct selection of mutual funds and the time horizon decisions.

Let’s go through the advantages of SIP:

  • You can track your investment dates
  • As it’s a regular investment scheme, you don’t need to arrange a lump sum figure to invest and hence lighter on the wallet.
  • Enjoy the power of compounding
  • Market timing is irrelevant as the focus is more on “time in the market”.
  • Rupee cost averaging offsets the higher value of NAV with the time when you can buy more mutual funds with lower NAV.

The Earlier The Investment The Better The Probability Of A Better Result.

  • The thumb rule of investing in a mutual fund is earlier you start investing, the prospects of better returns increases. Keeping 25 years as a starting age of investment, with every passing year the amount of investment figure increases to reach a certain goal.

Let’s explain this with an example:

Let’s say the investor’s goal is to achieve a figure of 1 crore by the age of 60, assuming the rate return to be 12%. If he starts at 25 years, the monthly investment he would require will be Rs. 1,555. Now with every passing year, the monthly investments will have to increase to meet the goals. Therefore, if you start investing at 45 years, the monthly investment will need to rise to Rs 20,017.

  • When you start investing early, when age, health and earning capacity is on your side, you can avail the benefits of the compounding power to full effect. The regular and systematic investment along with the SIP returns are reinvested, which gives much better dividends over a longer period.
  • Starting early will instill a habit of regular saving which will keep the investor in good stead in the future.

Is There Anything Such As The Best SIP Investments?

Everything is related to the investor’s investment goals and how he computes and invest in various schemes of the fund house, keeping in mind the eventual goal. So, in short, there is nothing like “best SIPs”.

Every mutual fund is different with various variables contributing to the final figure at the time of maturity. SIP investments in various funds will, therefore, yield different outputs.

The various factors to consider before investing in mutual funds through SIP are:

  • Performance which includes returns, risk, and
  • Fund manager and his team credibility in terms of managing and investing
  • The cost associated with managing the funds:
    • Expense ratio: annual expenses like overheads. Management team salary and administrative cost
    • Exit load: charged if the investor sells the units of a mutual fund within a particular time frame. It’s normally a fraction of the schemes NAV.

How To Start Investing In Mutual Funds With The Assistance Of SIP

You can start SIP investment either online or offline. With offline mode, you can invest through mutual fund houses/ agents/investment advisors or relationship managers.

In order to start SIP offline the following steps need to be performed:

  • Select the mutual fund that suits your needs and financial goals
  • Fill correctly the common application form mentioning the mutual fund name and other details
  • Fill in the KYC form if not already filled
  • Hand the forms to the fund houses fund distributor.

For online you can go to the mutual fund website and follow the instructions and perform steps according to the guidelines and checklist.

Long-Term Investments Form The Basis Of SIP

The investor should be very careful in creating a diversified portfolio and should start investing very early in his salaried life to get the maximum return.

 

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