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What is SIP? Benefits Of A Systematic Investment Plan (SIP)

“I don’t have enough money to invest.”
“Investing seems too difficult!”
“Long drawn-out investment processes bore me to death.”

If this has ever been you, then you have obviously never heard of Systematic Investment Plans! So buckle in – because we’re about to change your view on investing. 😎

Let’s start with – What Is A Systematic Investment Plan?

A Systematic Investment Plan or SIP is a popular method of investing, that allows you to invest in mutual funds regularly, and through small increments. SIPs are an attractive investment option for all investors (the vets and the newbies!), but it can be especially helpful for you if you are –

  1. Just starting out with investing.
  2. Don’t have large sums of capital to invest in one go.
  3. Simply trying to routinely invest. 🙂

We know we’ve piqued your interest now! So, let’s stay on track with this momentum, and dive into the features and benefits of an SIP.

Features of Systematic Investment Plans in India

There are a number of features of an SIP that make it a viable investment option for you. Here are some of the most important ones –

Flexibility – Want to invest just ₹1,000 this month? No problem! Want to invest even less? That’s fine too! A Systematic Investment Plan offers you the flexibility to invest small amounts of money, with some platforms offering investors the option to invest as little as ₹100. So, if you’re fresh out of college, or are working your first job, then investing through an SIP can be a cost-efficient way for you to start building your financial portfolio.

Rupee Cost Averaging – If an SIP was a scrumptious, layered, creamy cake – then rupee cost averaging would for sure be the cherry on top! Rupee cost averaging dictates a way to capitalize on market fluctuations rather than suffering because of them. SIPs follow the principle of rupee cost averaging. They allow you to make small investments in mutual funds, each month at various unit prices, rather than investing one large amount at a single unit price. Simply put – rupee cost averaging allows investors to benefit from lower average purchase costs, especially during market downturns, and potentially enhance their long-term returns. 

Compounding Interest – Okay, so there are two cherries on top of the SIP cake! Compounding interest is one key feature of investing in mutual funds through an SIP. Compounding (or compound) interest is the interest that you earn on your interest. Let’s look at this with an example – Let us say you invest ₹1,000 this year, and it is being compounded annually, at a 10% interest rate. So, at the end of one year, you have earned ₹100 as interest on your investment of ₹1,000. For the next year, this whole amount becomes your principal amount of investment, i.e., ₹1,100, on which you will now earn 10% interest. And it keeps going like this for the tenure of your investment. Compounding interest is the reason that we recommend staying invested for longer periods of time when investing, especially through SIPs; it helps in maximizing the growth potential of investments and can significantly enhance the final corpus.

Fund Management – Your SIP is dedicating your funds toward mutual funds, which are managed by experienced fund managers. Investing through an SIP with the help of a fund manager is a good option for those who are not entirely sure of where they want to invest. Professional fund managers who handle SIPs can ensure that young investors are making sound investment decisions, and are taking the right steps to maximize their financial returns.

So, clearly, SIPs have a lot of features that are working in their favor! Keep in mind that, ultimately, a Systematic Investment Plan is an instrument through which investors can grow their wealth and start making their money work for them.

Benefits of Systematic Investment Plans for Investors

All the features of SIPs prove to be beneficial for investors. Here are some important advantages that you can leverage if you opt to invest through a Systematic Investment Plan – 

Regularity – It can seem daunting to invest a lot of money once a year. But, if you break down your investments into smaller amounts, and choose to invest them regularly (monthly, in this case!), then the task becomes a lot easier. Since you can find SIP options that will let you invest as little as ₹100 a month, you can start investing without feeling the pressure to first accumulate capital and then invest it.

Diversification – There is an abundance of mutual fund options and stock options which allow for a Systematic Investment Plan as a mode of investing. This means that even when choosing to invest through SIPs, you can still diversify your portfolio and mitigate the risk of your investments. The investment risk can be spread across different asset classes, sectors, and companies, thereby reducing the impact of volatility associated with individual securities – making SIPs a fair tool for diversification.

Wealth Creation – Investing with SIPs is great. But staying invested via SIPs is simply amazing! The benefits of compounding become more and more robust, the longer you stay invested. The disciplined investment approach of SIPs coupled with the benefits of compounding over an extended period of time can yield great returns for investors. In fact, the sooner you start investing, the more time you have on your side to let compounding work its wonders and contribute toward your wealth creation.

Convenience – Investing in SIPs is so easy! Not only is it a fairly easy process if you are going to invest directly through a mutual funds portal, but today, a number of investment apps make Systematic Investment Plans easily accessible to investors. Investors can even automate their SIPs, which means they can set a mandate which will automatically deduct their selected SIP amount from their account once a month. Regular investing without manual intervention – the dream!

And there you have it – the many useful benefits that SIPs bestow upon the investor. The key takeaway when it comes to investing through SIPs is to view time as something that is directly related to the returns on investment – more time = compounding benefits = more gains. 🙂

We hope we’ve left no doubt in your mind that Systematic Investment Plans are a superlative and efficient instrument of wealth creation, and are definitely something worth looking into!

FAQs

What is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan or SIP is a popular method of investing, that allows you to invest in mutual funds regularly, and through small increments (as little as ₹100 on some investment platforms).

What is compounding interest?

Compound interest is defined as the interest calculated on the principal and the interest accumulated over the previous period.

What is the benefit of rupee cost averaging?

In rupee cost averaging, an investor will invest an amount at regular intervals, regardless of the per unit price. By doing so regularly, the investor takes the benefit of investing even through market fluctuations.

What are the key benefits of investing in SIPs?

Regularly investing in SIPs can be a good way to create wealth. It is easy to invest in SIPs, and it allows for diversification as well. 

What are the key features of SIPs in India?

SIPs in India are flexible instruments of investing. Two key features of SIPs are rupee cost averaging and compounding interest – both of which work in tandem to help create returns.

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