6 mins read . 11 Nov 2022
Systematic investment plan (SIP) of mutual funds are a systematic approach to mutual fund investment. The typical SIP plan entails investment of small amounts of money each month over a long period of a time on a sustained basis so as to generate wealth through the power of compounding. The most important step in a SIP is to create a very detailed and comprehensive SIP investment plan based on your long term goals to be achieved.
How do you decide how much your SIP can accumulate over time? You start with a SIP calculator online which can be used to simulate different combinations of yields, tenure and SIP amounts. SIP returns can be slightly better than lumpsum returns in most cases due to the power of rupee cost averaging. Among the many SIP benefits are the power of compounding and discipline. Here is all about SIP investment plans and returns.
There are several reasons for you to onboard your investment plan in mutual funds through SIPs. Here are 6 of the most compelling reasons for the same.
1) SIPs can be started with very small amounts. In fact, you can start a SIP with as low as Rs500 per month making it a highly affordable product. It is not a product only for people with hefty cash in the bank, but a true blue mass retail product. The main thing about SIP is to sustain the SIP over long periods of time so that compounding can actually work in your favour. You can do SIPs that are fortnightly, weekly, monthly or quarterly. However, the most popular SIPs are monthly SIPs since you can make them sync with your monthly income flows. That reduces the pressure on you.
2) SIPs are very flexible. You can start and stop the SIP at any point of time, although it is not advisable to stop SIPs that are pegged to your long term goals. Also, you can change the SIP amount or tenure and you can also change the SIP date if required. Normally, your income increases on a regular basis and the best way to play that is to use a Stepped up SIP. That is an automatic way of increasing your SIP commitment in a rule-based manner without putting too much burden on your finances.
3) SIPs offer rupee cost averaging. Here is how it works. In SIPs, you commit to invest a fixed sum of money on a particular date each month. If the market is up, you get more value for your SIP holdings and if the markets are down, you get more units. It is like heads you win and tails you don’t lose. Over time, this rupee cost averaging works to your favour and adds more wealth and reduces your cost of holding the SIP.
4) SIPs are about investment discipline. Normally, we all suffer from investing lethargy i.e. bring yourself to invest. SIP is a discipline as it is on an auto mode. You target a SIP amount and then make your household budget provisions accordingly. If you wait till you have a surplus to invest, you can wait for ever. SIP puts the discipline of saving and investing at a young age so that time works in your favour.
5) SIPs are indifferent to timing the market, but all about compounding. Nobody caught the tops and bottoms of the market precisely, not even the best of investors. It is tough for others to even try timing the market. SIPs do away with the need to time the market. Instead, as you stay invested, your principal earns more and your earnings add a lot more value over time. That is power of compounding at its best working for you. You juts make money work a lot harder for you.
6) Finally, SIPs gel with long term financial plans. Set a long term goal, peg a SIP to it and just watch it grow. You are just a passive investor watching the fund manager working hard to help you meet your financial goals. Of course, you need to monitor the SIP, but that is small to price pay for a big wealth creation opportunity.