People often tend to confuse SIP with mutual funds. Some are even convinced about SIP is an investment in itself. However, that is not true as SIP is just a mere tool to invest in market linked schemes like mutual funds. If you are looking for a reason to invest in mutual funds, there is not one but plenty. Firstly, they offer professional fund management which means even if you are new to mutual fund investing, you can still invest your hard-earned money in a suitable scheme and expect decent returns in the long run. Secondly, they offer diversification through a single investment, something which direct stock investments do not offer. Although there are many other reasons that make mutual funds a lucrative investment choice, one of the most important benefits is that you can invest in them via a Systematic Investment Plan.
Today we are going to discuss what Systematic Investment Plan and the top five reasons why investors prefer SIP over lumpsum.
What is a Systematic Investment Plan?
Also referred to as SIP, a Systematic Investment Plan is an easy to invest tool that lets retail investors save and invest a fixed sum regularly. Investors can also invest in mutual funds by making a one-time lumpsum investment, however, SIP is a much better choice for a lot of young investors.
Top five reasons for investors to consider SIP while investing in mutual funds
Invest small sums at regular intervals
Young investors mainly prefer SIP as they can save and invest a fixed sum from their monthly income regularly. These days Asset Management Companies are offering SIPs for an amount as low as Rs 500 per month. This allows almost anyone to invest in mutual funds without having to compromise on their existing lifestyle.
No upper limit
There is no upper limit on SIP investments. This means that a monthly SIP can be worth Rs 500 or it can be Rs 50,000 or Rs 50 lacs or even Rs 5 crore. It all depends on the individual investor’s risk appetite, investment objective, and ultimate financial. Although there is no upper limit for SIP, they do have a minimum investment sum and investors cannot invest a sum below the minimum investment. To know the minimum SIP sum investors must refer to the mutual fund Scheme Information Document (SID) or Key Information Memorandum (KIM).
Power of compounding
Power of compounding comes into effect when the initial investment made through SIP generates interest and when this interest gets reinvested in the sum and starts earning interest of its own. To witness the compounding effect investors may need to continue investing in mutual funds through SIP for a longer duration.
Rupee cost averaging
Do remember that the NAV of the mutual fund scheme, especially schemes like equity funds fluctuate from time to time since these funds predominantly invest in the equity market. Whenever the NAV is low, the investors can buy more units from the SIP sum. Since the SIP sum remains stagnant when the NAV is high the investor buys fewer units. This is referred to as rupee cost averaging, which is known to minimize the overall investment risk and average out the total cost of purchase because through this investment technique the investor is able to buy more units in the long haul.
SIP calculator
Investors can now find out the total assumed returns that they might earn through SIP investments with the help of the SIP calculator, a free online tool. Investors can use this calculator to know the exact SIP sum needed for monthly investing to achieve their ultimate financial goal.
