What is Systematic Investment Plan (SIP)? 5 Things to Know About SIPs
3 minsApril 03, 2017
An easy way to start investing! Start an SIP with a minimum amount. If not for anything else, it will help you save a certain amount of money every month.
Here are the 5 things you need to know about SIPs
A SIP (Systematic Investment Plan), where an investor invests a fixed amount of money every month, is the well-known answer. An SIP plan helps you invest a small amount in a mutual fund scheme of your choice, which in turn manages your investment portfolio.
Many of you might know how to start SIP investment and have a fair idea of its working. But here are 5 interesting things to know about Systematic Investment Plan (SIP):
- SIP acts as an automatic market timing mechanism! It forces you to buy more units when the price is down and fewer units when price is up. So, you reduce your average cost of purchase of shares or mutual fund units over its highs and lows, thus enhancing the returns. Adhering to this simple formula allows you to avoid nervous selling during market panics, as it evens out your investments during the inevitable
ups and downs of the market.
- There is a smarter way of investing which also takes into account that the market may be expensive and you should invest less in absolute terms. Or the market may be cheap, and you should invest more. This approach is called smart SIP!
With this, you first estimate how much money you will need to accumulate for a goal such as retirement. Then, based on the annualized return you expect to earn on your investments, you calculate how much you must invest each month to
achieve that goal if your return expectations are met. Then every month, you invest the set amount plus or minus the amount required to bring your portfolio’s value to where it should have been to remain on track toward your goal.
It changed my life…it taught me to save. And when there was an unplanned vacation, or a birthday party, I wasn’t struggling with my finances. I think it is a must.
Shobit Agarwal, 33, Corporate Lawyer
- SIPs help you inculcate discipline in your saving habit, by investing a small amount every month, you end up amassing a large corpus without straining yourself.
- SIPs also help you leverage the power of compounding, which in turn entail that the earlier you start saving, the faster your money multiplies. Over time, the impact of this steady investment is extraordinary
- SIPs let you invest in a mutual fund scheme of your choice. These schemes invest in a large assortment of companies from a variety of sectors like IT, Pharmaceuticals, Manufacturing, etc., which in turn helps you diversify your portfolio even
with a small investment.
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