We all have heard of the saying “Little drops of water make the mighty ocean”. Just like little drops of water can make the mighty ocean in the long run, A Systematic Investment Plan (SIP) is a simple yet a powerful tool used by investors worldwide as a method for savings and wealth accumulation. Investing through the SIP facility empowers you to plan and save for your future by inculcating in you the discipline of investing regularly and that should help on your way to achieving your financial Goals.
The SIP mode of investment in mutual funds is similar to the one followed while investing in a recurring deposit of a bank. In an RD you deposit a fixed sum of money into your recurring deposit account and enjoy a fixed rate of interest. But the only difference in case of SIPs is that, your money is deployed in a mutual fund scheme (equity schemes and / or debt schemes) and the returns generated for you by the respective funds are variable and are subject to market risks.
How Does the SIP Work?
In an SIP, a fixed amount of money gets debited from your bank account (either through an ECS mandate or through post-dated cheques) and gets invested into units of a Mutual Fund scheme chosen by you. The SIP also allows for the flexibility to invest on a daily, weekly, monthly and quarterly basis. This enables one to invest regularly and build wealth over the long-term.
Why should one go for an SIP?
Power of compounding: Saving small amounts over a long periods of time can beat hefty investments for smaller durations. This is the power of compounding. Eg; if you start investing Rs. 5000 p.m. for 20 years and your friend invests Rs. 1200000 (which is equal to your total investment through the tenure) for 10 years, you can earn Rs. 26 Lakh more than your friend. (Assumed rate of return is 15%).
Rupee cost averaging:
Timing the market is a difficult task. Rupee cost averaging is an automatic market timing mechanism. Under rupee-cost averaging, you would typically buy more mutual fund units when prices are low and similarly buy fewer mutual units when prices are high. This helps to invest money at low levels of market which we generally avoid doing if we are investing on our own. The typical reaction to low markets being the expectation that markets will further go down and hoping to invest when the market is at bottom levels, which is almost impossible to time.
Small Saving:
The SIP route enables you to invest in smaller amounts at regular intervals (daily, monthly or quarterly). This in turn reduces the burden of lump-sum investment. These days one can even invest an amount as small as Rs. 100 p.m. in SIPs and that helps to start saving with very small amounts as well.
Diversification with small amount:
The other positive from investing through SIP in mutual funds is that even with small amounts you are able to enjoy the benefits of diversification. Huge amounts would normally be required for an individual to achieve the desired diversification, which would not be possible for many of us. Diversification helps reduce the overall impact on the returns from a portfolio.
Make a habit of saving and let your money earn money for you. Even a small amount of investment on a regular basis can go some way to achieving your long term goals.
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