Systematic Investment Plan (SIP) is a disciplined approach to invest a fixed sum in Mutual Fund scheme enabling the investors to participate in capital market. Let’s look at few of the advantages which SIP offers.
1.Disciplined Investing approach: Some of you may opt for stock options by timing the market to accrue wealth. However, timing the market calls for market knowledge, research, technical analysis and a lot of time from your end, further it could also be risky too. Through disciplined, periodical investment, you can quit stressing about when and how much to invest. It eliminates the need to effectively follow the market constantly. Through a disciplined investment at regular intervals, SIP helps you achieve just that.
2. Rupee Cost Averaging: Rupee Cost Averaging is an effective investment strategy that eliminates the need to time the market. All you have to do is to invest a fixed pre chosen amount for a long period of time. Since the amount invested is constant, one buys more units when the price is low and fewer units when the price is high, helping investors accrue the Mutual Funds units at a lower average cost.
3. Simple, convenient and easy to monitor: You do not have to take time from your schedule to make your investments. With a simple auto – debit mandate form, the pre-fixed amount is debited from your account on the date of the month it’s opted for. You can monitor your progress of investment through periodic statement of accounts.
4. Benefits of Compounding: The key to building wealth is to start investing early and to keep investing regularly. A little measure of cash invested consistently can develop to a large compounding sum. This helps in creating a substantial amount of wealth which includes your own contribution, plus returns compounded over the years. For example, the following graph demonstrates the effect of returns on monthly investments of Rs. 1000 per month for a period of 30 years.
5. Power of starting early, helps create wealth: The earlier one starts regular savings, the easier it is for wealth creation. The graph below shows the impact of starting at various stages in life. Rs. 1000 was invested on a monthly basis till the retirement age of 60 years. The rate of return on SIPs investment was assumed at 10% p.a. It can be seen that even a five-year delay can make a significant reduction in overall creation of wealth.