What is Systematic Investment Plan ( SIP ) ?
What is SIP investment ?
What is Systematic Investment Planning ( SIP ) ?
a Mutual Fund SIP works on the principle of regular investments.
It is like your recurring deposit
where you put in a small amount every month.
It allows you to invest in a Mutual Fund
by making smaller periodic investments (monthly or quarterly)
in place of a heavy one-time investment.
SIP’s are a very good way to create your Retirement Corpus.
While making small investments through SIP may not seem appealing at first,
it enables investors to get into the habit of saving.
And over the years, it can really add up and give you handsome returns !
A monthly SIP of Rs. 1,000 at the rate of 15 % would grow to :
Rs. 2.78 lakh in 10 years,
Rs. 6.76 lakh in 15 years,
Rs. 15.15 lakh in 20 years and
Rs. 70.09 lakh in 30 years !
Even for the cash-rich, investment through SIP’s
reduces the chance of
investing at the wrong time and losing their sleep
over a wrong investment decision.
The main advantages of SIP investment are :
Discipline
The cardinal rule of building your corpus is
to stay focused, invest regularly and
maintain discipline in your investing pattern.
Power of Compounding
Investment gurus always recommend that one must start investing early in life.
One of the main reasons for doing that is the benefit of compounding.
Let’s explain this with an example. Person A started investing Rs. 10,000 per month at the age of 30.
Person B started investing the same amount every year at the age of 35.
When they attained the age of 60 respectively,
person A had built a corpus of Rs. 1.50 crores while
person B had a corpus of only Rs. 95.73 lakhs.
For this example, a rate of return of 8 % compounded has been assumed.
So the difference of Rs. 6,00,000 in amount invested
made a difference of more than Rs. 50 lakhs to their end-corpus.
That difference is due to the effect of compounding.
The longer the (compounding) period, the higher the returns.
Now, instead of investing Rs 10,000 each month,
suppose person A invested Rs. 15,000 every month, but starting at the age of 40.
The total amount invested, thus remains the same at Rs. 36 lakhs.
However, when person A is 60, his corpus will be Rs. 88.94 lakhs.
Again, he loses the advantage of compounding in the early years.
Rupee Cost Averaging
This is very important for investments in equities.
When you invest the same amount in a fund at regular intervals over time,
you buy more units when the price is lower.
Thus, you would reduce your average cost per share (or per unit) over time.
This strategy is called "rupee cost averaging".
With a sensible and long-term investment approach,
rupee cost averaging can smoothen out the market’s ups and downs
and reduces the risks of investing in volatile markets.
People who invest through SIP’s
capture the lows as well as the highs of the market.
In an SIP, your average cost of investing comes down
since you will go through all phases of the market, bull or bear.
Convenience
SIP is a very convenient way of investing.
just one cheque is to be submitted along with the application form.
The rest of the installments are invested
by directly debiting the investor’s bank account.
Other Advantages
There are no entry or exit loads on SIP investments.
Long Term Capital gains on units sold after a year are TAX-EXEMPT !
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