SYSTEMATIC INVESTMENT PLAN (SIP)
MEANING – –
The volatility of the stock market and the investment timing have given rise to the systematic investment plan. It is one of the most popular ways of investing in the stock market without worrying about the company’s fundamentals as the professionals manage the same.
-It works on the basic principle of consistency of investments. Like a recurring deposit of banks, a fixed amount, as decided by an investor, gets deducted from his bank account at selected intervals being monthly or quarterly.
- HOW DOES AN SIP WORK?
- STEPS TO COMMENCE A SIP
Interesting Facts about SIP
#1 – Start Small and Earn Big
Mutual funds encash the power of compounding. They take small amounts of SIPs from several investors and keep investing the income earned from these investments (when the Mutual fund type is growth), which results in a multiplier effect, getting good returns at the time of maturity.
#2 – Averaging Principle
When the stock market is bullish, it results in a high NAV, resulting in lesser units. As opposed to this, when the stock market is bearish, it results in low NAV, resulting in more units in the hands of an investor. This high and low NAV neutralizes the adverse effects of the market, creating a beneficiary position for the investor as a whole.
#3 – Going International
Because of globalization, now mutual funds are going global. As a result, your systematic investment plan amount is pouring into international markets, helping you reap the benefits arising from global changes.
- Example
Mr. Rob and Mr. Charlie both start their investment at the same time. But, Mr. Rob invests in mutual funds through a systematic investment plan, and Mr. Charlie invests in the bank’s recurring deposit.
Initial Fund Amount – Rs. 1000
Tenure – 3 years
Interest Rate Type – Recurring Deposit follows Simple Interest and Mutual Fund, Compounding
Rate of Return – 10%
After 3 years, at maturity, the investment would turn out to be like this-
See the maturity amount difference, Rs.31. Here, we took simpler and smaller figures for understanding purposes. Imagine the scenario when you are investing a big amount every month and measuring your maturity with the simpler interest investment amount. It is known as the power of the compounding of a systematic investment plan.
Conclusion
-In conclusion, SIPs are an excellent investment tool for beginner investors who want to invest in mutual funds in a systematic and disciplined manner. They offer several benefits, such as disciplined investing, cost-effectiveness, diversification, and the power of compounding.
-Investors should consider several factors before choosing a mutual fund, such as investment objective, risk appetite, fund performance, expense ratio, investment horizon, asset allocation, and the fund manager’s track record. By following these steps, investors can start investing in a SIP and build wealth over the long term
-It is the thumb rule in a systematic investment plan that the earlier you start, the better it will be. The longer you stay, the more you will reap the fruits of compounding. The consistency would pay you in the form of a mammoth amount.
-Investment in SIPs, keeping all things apart, is considered one of the best and safest ways to increase a person’s wealth in today’s turbulent scenario. Cost averaging and compounding would accompany you in the long run.
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