What is a SIP and why is everyone interested in it?

SIP

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Lately, the whole country seems to be interested in SIPs and the world of benefits they bring along. One could say it is because of rampant advertising and conversation around it. But the real reason is how systematic, easy to follow and beneficial it is for first-time investors.

What is SIP?

SIP stands for Systematic Investment Plan which allows investors to invest a small sum regularly in one’s preferred mutual fund scheme. By activating a SIP, a fixed amount is deducted from the investor’s bank account every month which gets invested in mutual funds of one’s choice.

A large sum can dig a considerable hole in one’s personal finances but smaller sums on a regular basis go unnoticed even. This is considered good practice for those who wish to venture into investments but also want to play it safe.

How do SIPs really work?

  1. The Rupee Cost Averaging:
    SIPs can essentially help you escape market volatility by eliminating the guessing game of the market performance. Regular investing ensures that the average purchase cost is evened out in the long run, thereby leading to net gains. When the market rises, you get fewer units and when the market falls, you receive more units. This minimises your risk and makes sure that you acquire investments at a lower average cost per unit.
  2. Compounding
    Saving a small sum of money for a long period of time can have an exponential impact on investments because of the compounding effect in economics. Basically, all you need to know about this is that regular investment spread over a longer duration of time yield greater returns and profits.

Benefits of SIP

  1. The ease: SIPs can develop financial discipline in a phased manner. It gives one the convenience of starting investments with as low as Rs 100 a month
  2. Rupee cost averaging: One does not have to time the market. With SIPs, you buy more units when markets are low and that reduces your overall cost of investment
  3. The power of compounding, at your disposal: through SIPs, one unleashes the power of compounding over a long period of time.
  4. 2x higher returns than RD: ELSS mutual funds have the potential to provide higher returns than FDs, PPFs and other traditional forms of investing.
  5. Lower risks: Lump sum investments usually exposes investors to higher capital risks, which discourages people from investing altogether. A SIP spreads your investments over time and reduces the risk to capital over time and eventually, you will be able to navigate volatility better.

Summing it up

SIPs are considered to be an easy option for those wishing to invest more into the market. With higher returns and the power of compounding, it is just what amateur investors would like to explore. 

One has to understand that every investor was a novice once. It only depends on experience, occasional failures, and the will to be better with financial judgements makes one an ace investor. It does take time, and efforts, however, if you wish to begin nonetheless, SIPs are a great choice!

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