What is SIP?
Systematic Investment Plan (SIP) is a smart and convenient financial planning tool for investing in mutual funds.SIP helps you to create wealth, by investing pre-determined amount every month, over a period of time.Investing for a long term goals ,lets you enjoy the benefits of two powerful strategies, rupee cost averaging andthe power of compounding.
How does SIP work?
A SIP is a flexible and easy investment plan. Your money is auto-debited from your bank account and invested into a specific mutual fund scheme. The biggest advantage of SIP is that one need not time the market. SIPallows one to buy units on a given date each month You are allocated certain number of units based on the ongoing market rate (called NAV or net asset value) for the day.
Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the
Power of Compounding
Rupee cost Averaging
With volatile markets, most investors remain skeptical about the best time to invest and try to time their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser when the price is high.
During volatile period, it may allow you to achieve a lower average cost per unit. For example, with Rs 1000 one can buy 50 units at Rs 20 per unit or 100 units at Rs.10 per unit depending upon whether the market is up or down. Thus,
more units are purchased when a schemes’ NAV is low and fewer units when the NAV is high. Hence, when the
two cases are taken together, cost is averaged out. The longer the time-frame, the larger are the benefits of
averaging.
Power of Compounding
This means the earlier one starts an SIP and longer the investment horizon, the larger the benefits. The reason being, each rupee one invests earns a return, which ends up as more rupees to earn a return, allowing investment to grow at a fast pace. Higher rates of return or longer investment time periods increase the principal amount in geometric proportions. This is the single most important reason for investors to start investing early and keep on investing on a regular basis to achieve the long-term financial goals.
Example
If you started investing Rs. 10000 a month on your 40th birthday, in 20 years time you would have put aside Rs. 24 lakhs. If that investment grew by an average of 12% a year, it would be worth Rs. 99.9 lakhs when you reach 60.
However, if you started investing 10 years earlier, your Rs. 10000 each month would add up to Rs. 36 lakh over 30 years. Assuming the same average annual growth of 12%, you would have Rs. 3.52 Cr on your 60th birthday - more than double the amount you would have received if you had started ten years later!
Benefits of Systematic Investment Plans
Best suited to- Build Retirement Fund and providing funds for Children’s education and wedding or any other
specific goal in your life.
Disciplined Saving - Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly.
Flexibility - While it is advisable to continue SIP investments with a long-term perspective, there is no
compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.
No need to time the market and lighter on pocket.
Long-Term Gains - Due to rupee-cost averaging and the power of compounding SIPs have the potential to
deliver attractive returns over a long investment horizon.
Convenience - SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to
facilitate auto-debits from your bank account.
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