SIP Investment: How does SIP work? Why should start to SIP?

What is SIP Investment?

Systematic Investment Plan or SIP is a most convenient way of mutual fund investment where you can invest a certain amount at regular intervals. Therefore, SIP investment help the investor to develop the habit of savings and create a planned approach of investment to achieve their financial goals.

So, if you do not have any SIP you can start by investing a certain amount at a regular interval say weekly, monthly or quarterly. This is simple, flexible and hassle-free. The investment amount automatically debited from your bank account and invested in mutual fund schemes.

After each installment of investment, you are assigned a number of units, as per the present Net Asset Value (NAV).

Read also:Mutual Funds: What are they & Types of Mutual Funds

How does SIP Work?

To invest in SIPs, you don’t require to be an expert in the Stock Market investment. Therefore, SIP is the safest and best choice of investment for beginners and for those who are not well-known in the financial market.

Each time you invest, you can choose the best SIP plan, and units are added to your account based on the current market price. You can apply for one or more SIP plans at a time.

Actually, SIPs works following two methods – Rupee Cost Averaging and Power of Compounding. So, let me tell you how they work on money invested by you.

Rupee-Cost Averaging

The equity market always volatile in nature. So, you must consider that the ups and downs are the integrated part of the market. Therefore, it is very difficult to understand what the best time for investing or what is not. But timing is not at all an easy thing to practice. Rupee-cost averaging helps investors to overcome this problem.

The thumb rule of investing is buy-low and sell-high. That means to buy more units of a mutual fund when the markets are down and fewer units when the markets are up.

It is difficult to be sure whether the market has hit the bottom or it won’t fall further. Similarly, when the market looks good, the price won’t rise further. Therefore, the only way to handle such uncertainty is to average cost of the purchase over a period of time.

So, SIP investment allows you to take advantage of rupee-cost averaging in an automated manner. Hope, the following example can simplify more.

Let’s assume that you have invested Rs. 2000 each month between January 2018 to December 2018. The share price varies with time. Therefore, the investment looks like this,

TIME Amount Paid Price per Unit Number of Unit Bought
January 2018 2000 50 40
February 2018 2000 54 37.04
March 2018 2000 46 43.48
April 2018 2000 41 48.78
May 2018 2000 38 52.63
June 2018 2000 32 62.5
July 2018 2000 44 45.45
August 2018 2000 41 48.78
September 2018 2000 43 46.51
October 2018 2000 42 47.62
November 2018 2000 43 46.51
December 2018 2000 49 40.82

Total amount of Investment: Rs. 24,000

Total number of units bought: 608.9

Average price per unit: Rs. 39.42

So, above average price per unit is lesser than the usual price per unit.

Hence, the rupee cost averaging works usefully in the volatile market even in the bullish market. In this way, SIP reduces the factor of volatility with the help of rupee cost averaging method. As a result, the overall gain increases effectively.

Please note: The above table and values are only provided for illustration purpose. So, it must not be correlated with the performance of any SIP mutual fund scheme.

Read also:#6 Best Saving Money idea for Salaried Employees

Power of Compounding

The power of compounding is about the earning interest by reinvesting the gained interest. As we work to earn money, in compound interest money works to make money.

Now, the crucial ingredient is the time in investment. So, the magic of compounding turns a small amount invested steadily into a big amount if you invested for the long run.

Consequently, the longer you make your money work, the more wealth you will create.

SIPs give a simple and disciplined way to accumulate wealth over a long period of time. Mutual Fund SIPs are subject to market risks. So, SIP work like bank recurring deposits and able to generate superior returns.

In Compound Interest as the time goes, the earnings do not multiply, but grow exponentially.

Why should Start SIP Investment?

SIP investments are an easy way to achieve financial goals. There are lots of benefits of investing in SIP. So, let’s found that why you should start SIP investment.

Start with Minimum Amount

You can start SIP investment in a mutual fund with a minimum investment of Rs.500. Moreover, over a period of time, you can increase the monthly investment installment by 15%.

So, this minimum (just Rs.500 ) SIP investment can be a great option for any young investor or newbies.

Develop Disciplined Approach

One of the significant benefits of SIP investment is that it develope a disciplined approach towards investment.

SIP Investment Develop Disciplined Approach

In this automated payment method, a fixed amount is deducted every month from the account. So, you don’t have to remember every month.

Work as an Emergency Fund

SIP investment allows simple withdrawal method. So, it can work as an emergency fund also. We all know the positive side of having an emergency fund that we can access in short notice.

Rupee Cost Averaging Method

The mutual fund market volatile in nature. But SIP investment has the benefit of rupee cost averaging method. So, you can buy more units when the market is low and fewer units when the market is on high. Therefore, the average cost per unit decrease and help you to accumulate more wealth.

Read also:Direct Mutual Fund – Everything You Need To Know

Power of Compounding

As you know that the thumb rule of Compound interest is to invest a small amount over a long period of time and get a handful return compared to a one-time investment.

Similarly, SIP work on your hard earned money to generate superior returns compared to fixed deposit or recurring deposit.

Easy to Monitor

All the SIP mutual funds have their online portal. So, you can open or maintain your portfolio from anywhere at any time.

SIP Investment is Easy to Monitor

SIP investment in the user-friendly, convenient and hassle-free mode of investment. So, this is an ideal investment option for the new age retail investors.

SIP investment also is a perfect choice for them who are not ready for direct investment in the stock market.

Flexibility

Another significant benefit of SIP investment is no lock-in period.

However, experts always recommend investing for a long period to get a maximum return.

SIP Investment is Flexible

Also, this flexible scheme allows investors to exit the plan any time as they want. Also, they can increase or decrease the investment amount of money being invested.

Provide Higher Returns Compared to RD

SIP investment not only helps to deal with market volatility but also provides returns irrespective of the market performance.

Most importantly, SIPs provide a much higher return compared to bank FDs and RDs.

Bottom Line

Consequently, you can realize that by investing a portion of your regular savings in mutual funds in a disciplined way through SIP, you can accumulate a large corpus over a sufficiently long investment horizon.

Whether, in the bearish market investment value, may temporarily decline. But similarly, you can accumulate more units at lower prices. That will definitely give you good returns in the future.

So, SIP investment is the best way of investing your hard earned money for the long run. Therefore, if you do not have SIP then start today. It will definitely create a win-win situation for you.

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