Systematic investment plans helped in encouraging Indians to invest. Before 1993 (the year SIP was introduced in India), middle-class people did not think they could invest in mutual funds because not many of them made enough money that could help them with investments. However, when SIPs were introduced, a lot of working-class individuals who were previously hesitant to invest because their entire earnings were devoted to monthly expenditures, started investing. This not only increased the number of mutual fund investments but also helped them with long-term wealth accumulation. Continue reading below to learn what SIPs are and how are they helpful.
What are SIPs?
They are one of the two modes of investment in which you are free to choose to invest a fixed part of your income in a mutual fund scheme at regular intervals (monthly being the most common example). Amongst the important aspects to remember about a systematic investment plan is that you are required to have a long-term goal and therefore, it is better if you were to start as soon as possible. To start a SIP plan, you need to identify your investment objectives, fill out your KYC and choose the SIP.
How do they work?
A mutual fund scheme is chosen by an investor after they have determined their financial goals and even investment horizon, i.e., the total duration you expect to hold on to the mutual fund scheme. After doing that they either choose to invest in lump-sum or through systematic investment plans. If they have chosen SIP, then, they proceed with regular monthly investments of a certain sum. In a SIP, you need to leave a standing instruction with the bank for automatic deduction from your bank account into the scheme. Your money is used by the fund manager to purchase a certain number of units. But the said units are not purchased randomly. The said purchases are done after studying the current market price of the financial instrument. In case you happen to be a risk-averse investor, you can opt for SIPs as they are one of the recommended ways to invest whenever the market is volatile.
Now that you know what SIPs are and how they work, let’s go through some of the benefits associated with the investment mode.
Merits of systematic investment plans:
- These plans are flexible:
An important merit of SIP is that they are known for providing you with tremendous flexibility. Moreover, systematic investment plans can be withdrawn according to your choice, meaning they don’t have a fixed tenure. Also, it is possible to opt for either full or partial withdrawals, and that too without incurring any losses for opting to withdraw. Another major feature is that the amount meant for deduction is also flexible and isn’t set in stone. Depending on the financial situation, the amount of investment can be increased or decreased. But there is one important thing you need to be aware of when it comes to SIPs. If you have opted for a systematic investment plan, ensure that you have a long-term goal and a long investment horizon for wealth creation.
- There is also the feature of rupee cost averaging:
With the help of this feature, an investor can purchase more units when the market is going through a low phase. Conversely, fewer units are purchased when the market is performing well. Rupee cost averaging is the inherent feature of SIP, where, at the time of every market correction, one can opt to buy more and reduce the cost of their investments when the market is performing well enough.
- Then, there are also the benefits of compounding:
When you allocate funds regularly through SIPs, the revenue generated through the mutual fund scheme gets reinvested. Over time, this results in a snowball effect. It means, your income may increase manifold if you held on to the mutual fund scheme for a decade. One can take the benefit of the compounding feature by opting to invest for an extended period. SIPs operate on the principle of compound interest. So, a small amount invested for a long time fetches better income than a one-time investment.
SIP was introduced in India three decades ago and since then, they have served as a simple investment mode to accumulate wealth over the long term.