Systematic Investment Plan (SIP): Get into the Habit of Regular and Systematic Investing
Written on Monday, April 17, 2017
By Mitali Sharma
Looking for ways to create wealth? Start with admitting that neither wealth creation can happen overnight nor money left idle can grow on its own. 'Investment' is the only way to make your money grow. In this blog, you will read about Systematic Investment Plan (SIP) and know about its wealth creation potential. SIP is not a product, it is a concept. Basically, it is a route to investment in mutual funds at a disciplined and regular manner. Through SIP route, you are allowed to invest a pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). The process of execution is like recurring deposits, but SIP makes you invest in mutual funds.
There are various advantages of taking up the SIP route. Primarily, it makes you a disciplined investor and inculcates in you the habit of regular saving and investing.
Systematic Investment Plan (SIP): No Need To Time The Market
There are various investors, who understand that although risk-oriented but equity mutual funds have high wealth creation potential. So there are many who wish to invest in Equity but they hesitate to go ahead because they think equity investments require timing the market. For all such investors, SIP is the best route because, with the systematic investment plan, it is not important what time you enter the market, rather it is important how much time you are in the market. In other words, you need not to time the market if you are investing in mutual funds through the SIP route.
SIP: The process is simple!
First, you got to select the funds offered by various Asset Management Companies (AMCs), based on the performance of the funds. To know the same, you can take professional help or can visit fund's rating websites. It is always advisable to select multiple funds. For example, you are investing Rs. 5000, then instead of investing the whole amount in one fund. It is better to invest to Rs. 2500 in two different funds.
Second, you need to pre-determine the amount you want to invest.
Third, you need to pre-set the interval on which you will be investing. The majority of people invest on a monthly basis. The investment happens through ECS auto-debit.
SIP: Rupee Cost Averaging
When you invest through SIP, you become a regular investor. So it doesn't matter when you are entering the market. For instance, you want to invest Rs. 2000 on a monthly basis. Since you will be investing every month, you don't need to keep a track whether the market is up or down. You just have to invest regularly. If in the month of April, the NAV of one unit of your fund is Rs 20, then with Rs. 2000 you will buy 100 units. If in the month of May, the market goes down and the NAV becomes Rs. 15, then you will buy 133.3 funds. Likewise, if in the month of June, the market goes up and NAV becomes Rs 25, then you will buy 80 units.
At the end of your investment tenure, say 3 years, the average of your accumulated no. of units will be calculated and accordingly you will get your returns. This concept is known as Rupee Cost Averaging. In SIP, you don't buy your units in one go, rather you buy units month-on-month and finally takes up the average of your no. of units. This way, you have the chances of buying more units compared to what you buy during one-time investment in mutual funds.
In one-time investment (lump-sum) investment, you get to buy your units only once. Therefore, you need to time the market. You profit if you enter the market when it is low. If you don't time the market and enter randomly, then you may end up buying fewer units, if the market is high. The best way to avoid this hassle is to take the SIP route.
The only rule of thumb in SIP is to invest for long term, minimum three-to-five years. The only you can benefit from Rupee Cost Averaging.
Systematic Investment Plan takes the advantage of market volatility. So as an investor, don't fear the markets ups-downs. Be the systematic investor and invest regularly. Better is to link your SIP with your long-term financial goal like retirement planning, children future planning etc. And this way you will easily be able to maintain your investment for a long term.