You may be wondering why every financial advisor talks about the SIP. Why are mutual funds promoting it? How would you profit from it? In this post, I would tell you the 5 top benefits of the SIP? After reading this article you would also start using this method. But first, let me tell you about the SIP.
SIP or systematic investment plan is a way of mutual fund investment. In this method, you invest a fixed amount regularly after a fixed interval. Your one-time effort is enough for multiple investments. You can learn more about the SIP in my other post. Now, let us talk about the advantages of this method.
#1. Disciplined Saving
SIP is the systematic regular investment. It remains regular because money is directly deducted from your account. You don’t play any role in further investment. In fact, your money gets invested before you think of any other expense.
- Because of the SIP, your investment goes into the auto-pilot mode.
- This disciplined investment is the key to achieve a long-term Goal. You would agree that constant effort is necessary to achieve a big target.
- When you start a SIP, you commit to a long-term investment. That is why the financial planners always suggest the SIP to for the long-term investment.
#2. No Need To Time the Market
We know that investment in shares gives the highest return. But, if you put money at a wrong time, the wait for a decent return can be longer. You can even see a loss in the shorter term.
But, do we know the right time to invest in the market? Can we predict the market movement?
It is very difficult to time the market. It may go down after your investment or It may further go up just after you sell. The volatility is the nature of the share market. That is why many investors burn their fingers.
The SIP is the way to beat this volatility. As you purchase the mutual fund units at different prices. It may be sometimes at a low price and sometimes high. After several months of this ups and downs, your average price of purchase would be neither very high nor very low. Thus, you buy the mutual fund scheme at an average price.
Since you get mutual fund unit at an average price, there would be less chance of loss. you may not get the highest return but, you would certainly get a decent return. So the second benefit of SIP is No Need To Time the Market.
#3. Benefit of Rupee Cost Averaging
As I have told above, due to the SIP, you get mutual fund units at the different price points. But during these investments, while the price of units changes, your investment amount remains the same. Thus, you buy more units when the price goes down whereas you buy fewer units when prices go up.
Note, this is an inbuilt mechanism to reduce the units when prices are up and increase the units when prices are down. So, you get more benefits from low prices and avoid loss of high prices. This autmatic balancing of purchase is called as the Rupee Cost Averaging.
In the SIP, you start investing from your monthly saving. This monthly saving starts growing from the first day. If the market gives a higher return, you investment start getting this higher return from the first instalment.
While, for a lump sum investment of the same amount, you would have to wait for a certain period. You would lose the growth of your money during this period. You know that a small difference of return can make big difference in the maturity amount because of the compounding.
The SIP is always convenient than lump-sum investment. It is better to invest every month as you get the pay every month. You don’t have to go through the two step process of saving and investing. The money is invested as it comes to your account.
You can do SIP for 12 months to 10 years. Once you give the SIP mandate, you are not required to do anything. You can forget about it.
The SIP investment lets you free from the price points. You are assured of average price hence the market volatility does not affect your action. You do not require to act according to the market movements.
Thus, the convenience is the fourth benefit of the SIP.
The SIP is a regular investment. But it gives you enough flexibility. You can stop it anytime. You can modify the amount. Even, some mutual fund companies give you an option for growing SIP.
There is a minimum amount limit for the mutual fund investment. But, for SIP, this limit is lower. The mutual fund schemes, which do not accept less than ₹5000 as a first investment, can start SIP with ₹1000.
So, now you know the benefits of SIP. But do you know the best mutual fund scheme to invest this year? You can check out my list of top mutual fund schemes.