Mutual funds offer investors looking to invest in equities but not having the time or the expertise to do research, an excellent investment option. These professionally manged funds invest in stocks and other instruments based on the investment goals and objectives set out by their asset management companies. Investments in mutual funds can be done in two ways- by investing a lump sum amount or choosing the SIP route. Let us find out What is SIP and Why should you go for it?
What is a SIP?
SIP or Systematic Investment Plan is a method of mutual fund investing wherein an investor agrees to contribute a fixed amount every month or quarter or half-yearly for a pre-decided period. An excellent way to inculcate disciplined investing, the SIP option encourages investors to keep aside the committed amount for investment in a mutual fund. This option provides investors a chance to earn good returns by investing continuously and benefiting from rupee cost averaging. Investors can use a SIP calculator to identify which SIP is suitable for them and matches their investment and risk profile.
How Does a SIP Investment Make You Disciplined?
When you decided to invest in mutual funds in India via the SIP route, you commit to putting in a specific amount. And to fulfil this commitment before the due date you have to be disciplined in your spending to keep aside the SIP amount. You can even link your SIP to your bank account and give your bank instructions to transfer a specific amount on the due dates. This saves you the hassle of worrying about your expenses and struggling to save. This way you start spending after keeping aside the SIP amount.
And in case you find it difficult to commit large amounts for mutual fund investments, you can start a SIP with as low as Rs 500 or Rs 1000 varying from one scheme to another. This low initial investment encourages a lot of investors to start saving early and investing in SIP for long-term returns. Some other benefits of choosing the SIP option of investing in mutual funds are:
- SIP Offers the Benefit of Rupee Cost Averaging
A major advantage of choosing the SIP option of investing in mutual funds is that you do not have to worry about timing the market in your aim to earn good returns. By committing a fixed amount, you tend to buy lesser units when the stock prices are high and more units when the prices are low. This means that you buy units during the different cycles of the market and thereby benefiting from rupee cost averaging.
- Compounding Benefit is Also Available
When you invest via SIP, the monthly returns generated on your investments are reinvested till maturity and provide you with the benefits of compounding.
- Stop Your SIP or Start a New One Anytime
Most mutual funds allow you to stop your SIP investments anytime you want or feel that you are not able to invest the committed amount. Similarly, if your income increases or you have another source of regular income you can start a new SIP and expand and diversify your investment portfolio. This option to start a new SIP anytime encourages you to use your enhanced income to make fresh investments and work to achieve your long-term goals.
Now that you are clear about What is SIP, you can choose to invest in one or more mutual funds based on your investment goals. It helps you become more disciplined in the way you spend and save. The option also offers you the advantages of rupee cost averaging and compounding thereby offering you good returns over the long term.
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