What is SIP? "Systematic Investment Plan"
Firstly it is pivotal to understand what SIP is. It is an acronym for Systematic Investment Plan. It is an investment mode that allows you to invest in mutual funds. As the term denotes, it is a structured approach to invest specified amounts of money periodically, such as monthly, quarterly, or semi-annually, etc. When you invest in SIP, it gets easier to satisfy your financial goals.
How does SIP work?
When you begin investing through a SIP, you invest a specified sum of money in a provided period. This amount equips you with an authority to buy some fund units. Investing in SIP for a long time enables you to invest in the fund during the highs and lows. In simpler words, an investor doesn’t need to time the market to invest. Market timing can be a risky bid as the chances of investing at a wrong time also exists. SIP investments get rid of this unpredictability aspect.
Find the best SIP to invest online and decide its investment tenure and frequency. It allows you to automate your investments. Investors need to give a standing instruction to their banks to transfer the amount directly from their bank account into the mutual fund SIP of their choice, on an appointed date every month (or quarter) etc.
The Standing Instructions feature promotes periodic scheduled payments for funds transfer, third party payment, and RTGS/NEFT/State Bank Group transactions.
Benefits of Investing in SIP
Wonders of compounding
Compounding comes to light when the returns you earn on your investments leads to earning returns.
When you invest through SIPs, the returns you earn will get reinvested. As the time moves ahead, this may increase your potential returns. A good way to bloat this profit is to invest for a longer duration. The earlier you begin investing the better your chances will be to make the most of your investments. It can have a substantial impact on your returns.
Low initial investment
An investor doesn't need a lot of money to invest in SIP. If you are skeptical regarding this way of investing, you can invest in mutual funds through a SIP with just Rs. 500 per month. It can be a reasonable way to invest each month without burning a hole in your pocket. As your income rises, you can choose to increase your monthly investment through a SIP step-up feature. Mutual fund houses permit investors to top up their SIPs regularly. So, even if you begin with Rs. 500 or Rs. 1,000 every month, it is possible to invest more over the years. This strategy can support you to accomplish your investment goals at a faster pace.
Rupee cost averaging
Rupee cost averaging is described as a concept where you buy more units when the Net Asset Value (NAV) of the fund is low, and lesser units when the NAV is on a higher side. Basically, it averages out your purchasing costs over the term of the investment period. You don’t need to go through the hassle of how to time the market when you invest through a SIP.
SIP can be an easier mode of investing. Similar to most investors, your hectic schedule doesn't allow you to spare some time to research extensive market research and reach a conclusion to alter or balance your portfolio. So, once you choose the best sip to invest, feel free to give standing instructions to the bank and see your money grow.
Form a habit of investing:
Many people keep their money in their savings account which usually doesn't yield much return. It's best to invest and begin your journey of investing. Investing is more than creating rainy day savings. It can support you to earn additional income without forcing yourself to become a workaholic.
SIP v/s Lump sum: where to invest
At present, two modes to invest in mutual funds are available:
In a lump sum investment, an investor invests a large amount of money in the mutual fund in one go.
Let's see the attributes of both above-written options to help you make a better decision.
Amount of money
If you have a limited amount to invest, SIP usually turns into a better option. Undoubtedly, SIP is one of the best investment options.
In a lump sum investment, you invest the entire money at once. You are required to invest at the right time to maximize your returns. You can earn good returns if the market performance is good. This approach entails a pitfall that you could suffer a substantial loss if the market suddenly goes downwards. It can be a practical approach for professional investors who are ready to invest a substantial chunk of money. But if you are an amateur in the field of investing, choosing SIP investments can help you dodge unnecessary risks.
In the long term, SIP investments enable investors to manage their finances in a better way. When you invest a fixed amount of money every month, you can manage your money in a manner that supports you to accomplish your investment. Your progress might be slower, but after investing for a while, you will notice a good amount is invested without struggling financially. SIP can assist you to make a large corpus gradually without bearing much risk.
This approach doesn’t occur for lump-sum investments because most investors may not have a big amount of money to invest regularly.
As per your investment amount, risk appetite, and experience, you can either opt for SIP or lump sum investments. But usually experts urge investors to invest through SIPs instead of gravitating towards a lump sum.