SIP (Systematic Investment Plan) is a facility offered by mutual funds to inculcate disciplined investment of a fixed amount of money at pre-defined intervals. This is a great option for those who want to invest in frequent intervals instead of investing the whole amount at once. It gives flexibility to the investor to invest in installments. It is not restricted to mutual funds and is also used as an investing strategy in the stock market and investing schemes.
Systematic Investment Plan is beneficial to investors but only with the installments feature? No, there are several benefits to the investors that SIP offers; here are some.
Mutual Funds are a great way to start an investing career. If one does not know about stocks and shares, a Mutual fund is an opportunity or an exposure to the equity market with minimal risk. Besides, the money is invested periodically, making it convenient for the investor and deducting directly from the bank. It is a safe investment because the money is invested in the mutual fund scheme that the investor decides.
Systematic Investment Plan (SIP) makes the process more disciplined and organized. Once the SIP is put in place, it becomes more flexible to invest in it either weekly, monthly, or quarterly basis depending on the scheme. This ensures the investor is not drained on a financial basis and makes investing much more convenient and flexible.
The basic foundation of mutual funds is a systematic or organized order of using money and distributing it with interest. SIP works in order and in a disciplined manner to comply with the convenience of the investor. Although this is not limited to mutual funds, there is a small difference in the stocks market where SIP helps in investing though the market is fluctuating. When the stock market hits rock-bottom, SIP allocates the investor more units and allocates lesser units when the market prices are high.
Most of the investments need the investor to invest huge amounts to get better and higher results. Besides, a few investments are so high that it would not be possible for most investors to invest in them. So, where does this huge number of people invest in? Mutual funds are the option. Mutual funds SIP option allows investors to invest as low as Rs.500, which is affordable for the greater audience.
Unlike most investments, Investors who invest in SIP mutual funds can find it convenient to invest because it is a hassle-free process. Once the mutual fund is applied, all the investor needs to do is ask the bank to enable auto-debits. The monthly, weekly, or quarterly SIP is deducted directly from the bank without any manual process. This is a great option for the investors who are busy earning money and let the process be automated. Apply and receive the interest in a timely manner.
Compounding is when the interest earned is invested back in the mutual fund for higher returns. Besides, the primary conduct needs to stay invested for a longer time to ensure higher profits and invest in the early stages.
The compounding effect magnifies the returns earned through SIP and invests for a longer term. It ensures that the interest is earned on the principal amount and the interest over a long period. This is highly beneficial for investors who want to earn more in the longer run.
Investors might want to invest in multiple stocks to diversify the portfolio, and buying individual stocks might want the investor to have a large surplus. This is not possible for all the investors, but when the investors invest in mutual funds, they can own multiple stocks in small quantities and at a lesser price.
One of the SIP benefits is it can be stopped anytime by opting out of the SIP plan. This is one of the biggest benefits over recurring deposits, which fine when the investment is stopped. Once the SIP is stopped, either the investor can return to the amount or continue to invest in the mutual fund.
Besides, SIP offers an option to skip the payment. If the investor has no balance in the account for SIP investment for a particular month, he/she can continue with the SIP in the next period without any problems or fines.
Final Words
Investing in mutual funds through SIP is convenient and gives the investment a chance to grow in the longer run. There are several benefits to the investors who use SIP in mutual funds, and one of the most beneficial feature is owning more stocks in smaller quantities and at lesser prices.
A Systematic Investment Plan (SIP) gives flexibility, long-term gains, regular saving, convenience, and investment starting as low as Rs.500/Month.
The formula to calculate SIP is, FV = P [ (1+i)^n-1 ] * (1+i)/i
Where,
FV - Future value or the amount at the maturity,
P - Amount invested through SIP,
i - Compounded rate of return,
n - investment duration in months,
r - Expected rate of return
It depends but comparing with all the investment schemes, SIP is one of the high-returning and low-risk investments.
SIP such as equity and balanced mutual funds are considered in the long-term and have tax benefits. However, SIP in the short-term such as debt funds or hybrid funds, is 20% taxable after the indexation.
Yes, money is at risk in any type of investment; the level of impact the investment risk has determined if the money will grow or the losses will incur. SIP's have low risk, but there is a chance of losing certain money in some cases.