SYSTEMATIC INVESTMENT PLAN
Systematic investment plan better known as SIP is a strategic plan which allows an investor to invest a particular amount of money at a regular interval. The right explanation can be portrayed as, instead of investing a lump sum amount in a year at once, investor can break up their investment as per their own choice of flexibility from the options rendered, like weekly, monthly or quarterly. Hence SIP is an investment plan which is smart, hassle-less, technique of investing in mutual fund or other instrument that can help in creation of wealth for an investor.
Functioning of SIP
SIP makes all investment more flexible and easier for the investors. When you apply for SIP, your money will automatically get debited from your bank account at a regular interval as per mentioned in your instrument of investment. The amount thus deducted gets invested in the mutual fund that has been purchased by you. Based on your net asset value or NAV of the fund, a certain number of units is allocated to you in a day. Every time you invest in the fund a certain amount of unit get credited to your fund account based on the ongoing market value or NAV.
It is not necessary for an investor to be an expert in market timing, to invest in a stock market. Units are generally purchased at different rates. With higher price an investor will buy fewer units, but will purchase higher units if the prices of the units are lower.
There are two notable methodologies in SIP which largely benefits the investors. They are Power of compounding and Rupee cost averaging.
Power of compounding: In this technique you earn interest on whatever amount you have invested in the market. These interests get accumulated and compounded over a period of time, the longer is the tenure of the investment, the higher will the fund value of the investment made will become. Therefore if you invest for a longer period of time the more wealth will accumulate with the power of compounding. Hence, it is always suggestible to start investing early in SIP as that will generate more wealth than starting late.
Rupee cost averaging: The stock market in India is highly unpredictable in nature. Hence it is highly difficult to analyse when to start investing in the market and when not to. Rupee cost averaging technique helps investor to resolve this complication during investing. It allows the invested money to buy fewer units when the prices of the units are higher and more units when the prices of the units are lower. It also allows an investor to get lower average cost per unit when the market is volatile in nature.
Advantages of SIP
Disciple: A sound planning and a proper discipline play an important role in a successful investment. When you are investing in a SIP, you decide to invest at a regular interval that may be monthly or quarterly. This creates a discipline saving habit, and to get the maximum benefit out of it one should start investing early.
Flexibility: There is no fixed lock period under SIP investments; as a result investor can exit the plan whenever they wish to. Further, SIP provides flexibility to the investor to increase or decrease the investment amount whenever they wish to.
Long Term Gain: SIP is one of the finest long term investment goals. With an initial small investment amount to begin with, an investor may not get a huge profit in the beginning. However, in long run this investment will fetch a huge amount of profit and growth to your investment. Rupee cost averaging and Power of compounding techniques are the main reason for such high return on investment.
Convenience: SIP is one of the most convenient and hassles-less investment structure. You can authorize an ECS mandate from your bank to automatically pay for your SIP investment on a monthly basis.
Moderate Risk: Active investments require huge resource, and smaller retail investor does not possess such resource. Hence SIP provides them systematic option to invest and earn above average return on their investment with moderate risk involvement.
Starting to invest early in a systematic manner with the flexibility of adjusting investment amount, SIP is one of the finest investment instruments of wealth creation.