Systematic Investment Plan (SIP)

 

Systematic Investment Plan (SIP)

Sip is an investment route wherein one can invest a fixed amount at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The instalment amount could be as little as INR 500 a month and is like a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.

SIP has been gaining popularity among Indian investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans are easily the best way to enter the world of investments for the long term.

How does a SIP work? 

Through SIPs you can invest in any funds or shares, which help you, create wealth over the long term. Here, generating returns and creating wealth is not the same thing. Investing in fixed deposits only helps you in generating returns. But if you want to create wealth, you can invest in SIP mutual funds. And this amount is automatically deducted from your bank account at the interval at which you choose to invest. 

Let’s suppose, you invest a certain amount in a monthly SIP and have automated your deduction date as 5th of every month. So, this amount will be automatically deducted from your bank account on the 5th of every month to be invested on the selected mutual fund. 

How investing in SIPs helps you create wealth?

In exchange for the money that has been paid to mutual funds, it allots a number of units to you. 

For example, let’s assume that the NAV for a mutual fund is currently Rs 20. Now if you invest Rs 1,000 in that mutual fund, you will be allotted 50 units of the scheme. As the NAV of the mutual fund increases, your investments will also grow accordingly. So, if the next year, the NAV of this fund becomes Rs 30, then the 50 units that you had bought for Rs 1000, would be worth Rs 1,500 after the increase. This is the way your investment grows, helping you to create wealth over the long term. 

As an investor, the next question you might ask is why should I invest in SIP? 

Here are the 3 benefits of investing in SIPs

#Number 1: Rupee cost averaging:

Whenever you invest in a SIP, your cost gets averaged out. As you see, the markets move in cycle. Sometimes it is bearish, then it turns bullish and then again, bearish, and then bullish. This is how the cycle moves. So, if you are investing a fixed amount on a regular basis in a SIP, in the time when the markets are bearish, you will be allotted more units for your investments. Meanwhile when the markets go up, the number of units that will be allotted for your investments will be much lesser. That is, when the markets are down you are buying more units and when the markets are at the peak, you are buying less. This way your cost gets averaged out. Now, when the market cycle changes, for example from bearish to bullish, since your cost has been averaged out, this becomes an opportunity to earn great returns. Eventually, it will help you to create great wealth on your investments. So if you are investing in a SIP, you do not need to think about the ups and downs of the market cycle, as the cost automatically gets averaged out.

Number 2: Power of compounding:

Warren Buffet started investing at the age of 14, but his money started to grow exponentially when he was 50. Power of compounding is often referred to as the eighth wonder of the world. And here, you must be thinking, what this power of compounding means? Under the power of compounding, you not only get returns on the money which has been invested but also on the gains. And this way you can create a great amount of wealth over a period of time. Let’s suppose, in one year, you have invested Rs 1 lakh in a mutual fund. Its one-year return is 15 percent. So, by the end of the year, this amount will be Rs 1 lakh 15 thousand. What power of compounding does is, in the next year (assuming the rate of return if 15 percent), it will provide the return on Rs 1 lakh 15 thousand, instead of your original investment of Rs 1 lakh. So, this way, in the second year, you will be getting a return on money that you have invested, and on the gain from the previous year. By the end of the second year, the amount would be Rs 1 lakh 32 thousand.

Is SIP really create wealth

If you are asking this question, the answer may not be yes always. All the investment are subject to market risk. Moreover, the performance of the mutual funds is based on the effectiveness of the fund manager. We need to accept the reality that most of the Fund manager are not real experts. The performance of many mutual funds and it is performance based on SIP is as under.

Conclusion

If you want to create SIP, you shall be prepared to wait for longer period and watchful about the market. The exit shall be also at the appropriate time so that you will make profit. From the above, none of the mutual fund has outperformed the NIFTY index and failed when there is a free fall in nifty and eroded the capital. This has happened when the Nifty fall heavily in 2020.  Hence, we need to understand the risk in Mutual funds and market securities and invest carefully based on out risk appetites

Source https://bluechipindia.co.in/    NSE - National Stock Exchange of India Ltd. (nseindia.com)