What is SIP and Its Advantages?
A Systematic Investment Plan is commonly known as SIP. In this plan, you can regularly invest a fixed amount in your preferred Mutual Fund scheme. Here, a fixed amount is deducted each month from your savings account. This amount is then invested in the Mutual Fund of your choice.
Advantages of investing in SIP:
Here is a look at the manifold advantages of investing in SIP.
Simplicity of choice:
With SIP, you can start investing small amounts, and watch it grow big. You can start investing with a minimum amount of Rs 500 each month. A SIP is not only simple and convenient to track, but also inculcates a sense of financial discipline, where you save more.
Rupee Cost Averaging:
The unique feature of SIP is the Rupee Cost averaging, where you end up buying more units when the market is low. Conversely, you will buy less when the market is on the upswing. This is because of the inherent feature of SIP, where at every market correction, you will buy more. Not only does this reduce your cost of investment, but also results in significant gains
SIP provides you with tremendous flexibility. If you are afraid of long-term commitment by investing in instruments like Public Provident Fund (PPF) or Unit Linked Insurance Plans (ULIPs), then SIP is just the right answer. These are open ended funds, and could be withdrawn as per your choice. In other words, SIPs do not have a fixed tenor. You can either withdraw the full or a partial amount from your investment, without incurring any losses. What’s more the amount of investment is also flexible: it can be either increased or decreased. You must, however, remember to have a long investment horizon for wealth creation.
As compared to traditional fixed deposits or recurring deposits, SIP provides double the returns. This can help you beat the rising costs because of inflation.
Power of compounding:
SIP operates on the principle of compounding or receiving compound interest on your investments. In other words, a small amount invested for a long time period would fetch better returns than a one-time investment.
Acts as an emergency fund:
Being an open-ended fund without any tenor, you can withdraw your SIP investment to meet any emergency situations like sudden hospitalisation or loss of job.
How to invest in SIP?
· Identify your financial and investment goal:
First of all, you should identify your investment goal–whether it is wealth creation for short-term, medium-term or long-term. Start investing in SIP as per your goal. Remember that longer duration SIP yields higher returns.
· Select the right Mutual Fund:
You must then zero in on the right SIP mutual fund which is in consonance with your financial goals. You can compare different SIPs, and select the best.
· Contact the financial institution:
Now you must inform the financial company about your decision to invest in the specific SIP. Fill the requisite form, and complete KYC documentation.
When your research is complete and you’re ready to make an informed decision, you can invest in your preferred SIP. You can do so with the help of an online Demat account, to help simplify the process. This is particularly helpful because, when you open Demat account online, you can consolidate and view your entire portfolio at one place. Thus, a demat account becomes even more beneficial as you expand your investments and begin investing more frequently.
Thus, SIP stands for minimum investments and maximum returns. Invest in an SIP now and reap the returns later!
This Content has originally written by IIFL team. No Copyright/IPR breach is intended.