Investment process is always like, Where to invest? How much to invest?
SIP is a perfect solution to all these questions. Let’s understand about this excellent investment tool, SIP in detail.
What is SIP?
Systematic Investment Plan (SIP) is a type of investment where one can invest a certain amount at regular intervals in a preferred investment scheme. When any investor pays his installment amount through SIP, a fixed amount is deducted from the account every month based on the frequency chosen. The popularity trend of SIPs has gone very high in the last few years. If you are really looking for some extra income, investing in mutual funds can be a smart way as it starts with a very less amount of Rs 500 every month through SIP. Also, it’s a great exposure to the equity market for ones who don’t know much about the stock market.
How does SIPs work?
SIP allows you to invest in any type of mutual funds which helps you create wealth in the long run. Investors will receive a number of units in exchange for the amount paid to the mutual funds. Let’s understand this clearly with an example-
Let’s assume that NAV is currently Rs 20 for a mutual fund, if you invest Rs1000, you will get 50 units of the investment scheme. Your investment will grow according to the increase in NAV of the mutual funds. Next year, the NAV of the mutual fund will become Rs 30 then the 50 units you are allotted for Rs 1000 will now be worth Rs 1500. This way your investment grows over the years creating wealth for you.
The answer to the question, why should you choose to invest your money in SIP plans can be availed simply by understanding its benefits.
Benefits of investing in mutual funds through SIPs
- Starts with low investment: With SIPs, you can start your investment with as low as 100 rs per month and reap good returns in the long run. You can increase your monthly SIPs overtime when you are confident enough about your investment plans. SIP is known to be the most disciplined and convenient way of investing in mutual funds.
- Power of Compounding
Whenever any investor invests an amount of money, he will earn interest on it which gets compounded. This means that the interest that has been added also earns interest. You will realize that at the end of the tenure, the wealth accumulation is at its best in the long run. Investment done for a longer period of time helps you in building wealth at an accelerated pace on account of the compounding effect.
Let’s understand this with an example-
Suppose sudha has invested 10,000 in an investment scheme that brings 10% returns. She decided to reinvest the returns, thus adding it to the already invested amount i.e principal amount. She wants to keep this investment for 30 years, the first year interest she gets is Rs 1000. In the second year, the principal amount becomes 11000(P+I) based on the power of compounding, the interest will be calculated on the renewed principal amount. With the time passes, the principal amount keeps increasing and the final returns will be much more than she invested.
We should always keep a fund aside for our unplanned and unexpected emergencies. So, SIP investment allows you to stop your SIP any time and redeem the investment for any emergency purpose.
4. Rupee Cost Averaging
Rupee cost average is basically the average of the cost at which you purchase units of a mutual fund. An efficient investor will always purchase more units when the market is down and less units when the market is at the peak. This way your cost gets averaged out and you have the opportunity to gain great returns as compared to direct mutual fund investment. Market cycle keeps on changing, sometimes high, sometimes low. When investing through SIP, you don’t need to think much about ups and downs of the market as the cost gets automatically averaged out.
5. Gets you higher returns
Investment in SIP is the best option to create wealth in the long run as it provides much higher returns than PPFs, FDs and other traditional investment options available in the market.
Difference Between SIP and Other investment options
|SIPs||Other investment Options|
|Start investment with smaller amount||Need a good amount to start investment.|
|fixed amount at regular intervals.||One-time investment in a year.|
|Earns higher returns when the market is low.||Earns higher when the market is at the peak.|
|SIPs help you to protect your investment during market crashes.||Most of the investments suffered major losses during the market crash.|
Before moving forward with an SIP investment plan, it’s always good to research and know where to invest to get the best returns. Check out some good investment plans, use a SIP calculator to calculate the returns and get the best SIP investment plan to achieve your financial goals. To help you with this,we have shortlisted some best SIP plans in India so that you can take a well-informed decision-
|SIP Scheme||3 year returns||5 year returns|
|Aditya Birla Sun Life||8.39%||9.13%|
|Birla SL Balanced ‘95 fund||9.42%||16.83%|
|SBI Blue Chip Fund-Reg(G)||8.5||17.8|
|Birla SL Frontline Equity fund||21.74%||17.29%|
|HDFC Mid cap opportunities Fund||33.33%||24.77%|
|HDFC small cap fund||21.52%||24.31%|
Why Should You Invest in SIP Mutual Funds?
SIP allows you to invest a fixed amount at regular intervals instead of making one-time investment. There are several reasons why you should go for SIP investment plan-
- Investment through SIP helps to reduce the average cost. You purchase more units when the market is not doing well and less units when the market booms. With this, you would decrease the cost per unit in the long run.
- It also helps you in minimizing the risk of equity fluctuations. SIP allows you to make periodic investments in equities which helps you sail easily through the ups and downs of the market.
- Helps you create wealth by investing for a longer period of time. Even if you have started with a very less amount, you will enjoy lots of benefits.
- Does not strain your finances as it lets you invest a very small amount monthly, weekly or quarterly as per the plan chosen by you.
- Helps you become a disciplined investor as it includes an automated payment option which saves you from manually depositing the amount.