SIP or Systematic Investment Plan is a hassle free and smart mode of investing money in mutual funds. SIPs allow you to invest a pre-determined amount periodically (quarterly, monthly etc). It is a disciplined approach to investing and allows you to develop the habit of steady wealth creation and saving for the future.
Once you have started investing through an SIP, then it is easy. The money is automatically debited from your bank account at designated times and is invested in a special mutual fund scheme. You are provided a certain number of units based on the ongoing market rate (known as Net Asset Value or NAV) for the day. Every time money is deducted from your bank account, additional units in the scheme are bought at market rate and added to your account. Therefore, the units are purchased at differing rates while the investors benefit from Power of Compounding and Rupee Cost Averaging.
What is Rupee Cost Averaging?
Most investors are sceptical about the right time to invest as the market is at times volatile. They time their entry in the market. Rupee cost averaging provides you with an option of opting out of the game. As you are a regular investor, fewer units are bought when the price is high while more units are bought when the price is low. During a period of volatility, you might be allowed to gain a lower average cost per unit.
There are several benefits to opting for SIP Investment Plans. Some of them are:
1. Flexibility- Even though SIP investments are advised to be continued with long term views, there is no obligation to continue for any particular period. Investors can discontinue a plan at any time. One can also decrease or increase the amount to be invested.
2. Convenience- SIP Investment Plans are hassle free modes of investment. A standing instruction can be issued to the bank for auto debits from your savings account.
3. Long Term Gains- Because of the power of compounding and rupee cost averaging, SIPs are potent enough for delivering attractive returns of long investment horizons.
4. Disciplined Saving- The strategy to successful investments is discipline. When an investment is made through SIP, then you have to commit yourself to saving regularly. Every investment is viewed as a step towards attaining financial objectives.
Over the years, SIP Investment Plans have proven to be the right mode of investment for retail investors who do not always have access to resources for pursuing active investments.