Systematic Investment Plan (SIP)
An
SIP is a method of investing a fixed sum, on a regular basis, in a mutual
fund scheme.
It
is similar to regular saving schemes like a recurring deposit. An SIP
allows one to buy
A SIP can be started with as small as Rs 500 per month in ELSS schemes to Rs 1,000 per month in diversified equity schemes.
Buy
low sell high, just four words sum up a winning strategy for the stock
markets. But timing the market is not easy for everyone. In timing the
markets one can miss the larger rally and may stay out while the markets
were doing well. Therefore, rather than timing the market, investing month
after month will ensure that one is invested at the high and the low, and
make the best out of an opportunity that could be tough to predict in
advance.
Why SIP?
Qualified and experienced professionals who have the expertise of investment techniques, backed by dedicated investment research team, manage Mutual Fund investments You can purchase scheme units at a lesser cost as most of the Asset Management Companies (AMCs) charge less “entry load” (for some scheme even NIL) for SIP investments, as compared to normal purchases in the scheme.
SIPs make the volatility in the market work in your favour. Since a fixed amount is invested more units are purchased when a schemes NAV is low and fewer units when the NAV is high. As a result, over a period of time these market fluctuations are generally averaged.
Thus the average cost of your investment is often reduced. Since you invest regularly, it makes you disciplined in your savings, which leads to wealth accumulation.
Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive alternative. (Read more - The Investors biggest Dilemma)
Other reasons.
It’s an expert’s field
Let’s leave it to
them Another
advantage of investing through mutual funds is that even with small
amounts we are able to enjoy the benefits of diversification. Huge amounts
would be required for an individual to achieve the desired
diversification, which would not be possible for many of us.
Diversification reduces the overall impact on the returns from a
portfolio, on account of a loss in a particular company/sector.
Putting
eggs in different baskets
Management
of the fund by the professionals or experts is one of the key advantages
of investing through a mutual fund. They regularly carry out extensive
research - on the company,
the industry and the economy – thus ensuring informed investment.
Secondly, they regularly track the market. Thus for many of us who do not
have the desired expertise and are too busy with our vocation to devote
sufficient time and effort to investing in equity, mutual funds offer an
attractive alternative. (Read more - The Investors biggest Dilemma)
It’s all transparent & well regulated The Mutual Fund industry
is well regulated both by SEBI and AMFI. They have, over the years,
introduced regulations, which ensure smooth and transparent functioning of
the mutual funds industry. This makes it safer and convenient for
investors to invest through the mutual funds. (Check out - Foolproof
strategies to maximize your profits)
One
of the biggest difficulties in equity investing is WHEN to invest, apart
from the other big question WHERE to invest. While, investing in a mutual
fund solves the issue of ‘where’ to invest, SIP helps us to overcome
the problem of ‘when’. SIP is a disciplined investing irrespective of
the state of the market. It thus makes the market timing totally
irrelevant. And today when the markets are high, it may not be prudent to
commit large sums at one go. With the next 2-3 years looking good from
Indian Economy point of view, one can expect handsome returns thru’
regular investing
Mutual
Funds allow us to invest very small amounts (Rs 500 – Rs 1000) in SIP,
as against larger one-time investment required, if we were to buy directly
from the market.
This
makes investing easier as it does not strain our monthly finances. It,
therefore, becomes an ideal investment option for a small-time investor,
who would otherwise not be able to enjoy the benefits of investing in the
equity market.
In
SIP we are investing a fixed amount regularly. Therefore, we end up buying
more number of units when the markets are down and NAV is low and less
number of units when the markets are up and the NAV is high. This is
called rupee-cost averaging. Generally, we would stay away from buying
when the markets are down. We generally tend to invest when the markets
are rising. SIP works as a good discipline as it forces us to buy even
when the markets are low, which actually is the best time to buy.
Helps to fulfill our dreams
The
investments we make are ultimately for some objectives such as to buy a
house, children’s education, marriage etc. And many of them require a
huge one-time
investment. As it would usually not be possible raise such large amounts
at short notice, we need to build the corpus over a longer period of time,
through small but regular investments. This is what SIP is all about.
Small investments, over a period of time, result in large wealth and help
fulfill our dreams & aspirations. The SIP reduces the average purchase
cost, even in volatile markets with relative ease. When you invest a fixed
amount every month, the number of mutual fund units you actually buy
depends on their market price. Therefore, with the money you invest each
month, you can buy less units when the market moves up and more units when
the market moves down This means you are averaging out your cost.
If
you invest Rs 1000 a month at a price of Rs 20 a unit, you will have
bought 50 units (1000/20). But at a price of Rs 10 per unit, you will have
bought 100 units (1000/10). Investing a fixed sum regularly means
averaging out the cost, as you get fewer units when the price goes up and
more when the price goes down
Copyright: Keynote Consultancy P. Ltd