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SIP - Systematic (safe) investment plan




SIP - Systematic (safe) investment plan

SIP i.e. Systematic Investment Plan is a method of investing and not a product or investment option. It is just a process through which you can contribute small but regular amounts to build a good corpus. It is usually considered a good method if you have long term investment goals.
SIP is nothing but a systematic regular investment plan, mostly monthly or quarterly, of a particular amount in a mutual fund scheme. It is similar to a bank recurring deposit. It allows an investor to deposit small amount at regular periodic intervals in place of a single heavy one-time investment.
Systematic Investment Plan which is generally marketed as a safe and sure route of investments in equities to outperform the markets and create wealth over the long term. SIP is certainly safe for mutual funds.

BENEFITS OF SYSTEMATIC INVESTMENT PLAN (SIP) :

1. Discipline :

You attain investment discipline as a fixed amount needs to be invested regularly. This helps in maintaining a focused approach and building a good corpus for yourself. Moreover, parting from a small amount like anything ranging from Rs.500 to Rs.1500 monthly does not seem to be a difficult task. It just inculcates the habit of saving.
e.g. If you are a salaried person getting a monthly salary, its is a very good option to have monthly investments of say Rs.500 or Rs.1000 in the form of SIP.

2. Convenience:

All the processes have been made online for the convenience of investors. You just need to set aside small amounts for investment. With the facility of ECS mandate you can even instruct the bank to allow auto debit from your savings account towards SIP. This will save you from the hassle of signing cheques or making payments yourself. Also,there shall be no chance of missing the monthly or quarterly investment as the case may be.




3. Cost Averaging:

Investors buy more units when the market is low i.e. NAV (Net Asset Value) is low and buy less units when market tends to rise. This leads to reduction in the average cost of purchasing the financial assets. This can be seen if investment is done for long periods where the investor gains maximum benefits due to better cost averaging.

4. Power of Compounding :

Power of Compounding: Some term compounding as the "eight" wonder of the world and it really is. Very few people realize how powerful compounding is over long periods of time - small items compounded regularly over longer periods yield big difference in the final results.

For example, Rs.5000 invested monthly at a 10% p.a. return over a 30 and 35 year period would accumulate to Rs.1.13 crores and Rs.1.90 crores, respectively - a massive difference of Rs.77 lacs. 

Hence, just by starting 5-years earlier, a person would ultimately be able to accumulate Rs.77 lacs more - that is the power of compounding. The first one i.e. rupee cost averaging is the general perceived benefit of investing through a SIP route - the other two ones are advantages of investing through any regular investment method.

If you invest small amounts today, you can build a good corpus for your retirement. This is possible with the power of compounding.

In simple terms, Compounding refers to when  Interest of first year  is added to principal amount of next year and in the next year you earn interest on both Principal +Interest(For Yr 1).This means you earn not only on the amount invested but on the closing balance including interest earned.

So, the earlier you start investing, the fewer amounts you need to invest over a longer period and the maximum returns you can enjoy. The magic of compounding helps you set a big corpus for you after retirement life.

You can make way for sound financial planning by investing at a young age. These small investments done now, will grow your money and you can enjoy higher returns in the years to come.

5. Big Corpus on Maturity :

With the help of cost averaging, you tend to yield high returns over a long period of time especially in an equity SIP. But,investing in equity is meant for risk takers since it does not guarantee assured returns. So, debt funds are a good investment option for the safe players who don’t like taking much risk.

Hence, SIP is considered as best suited for those having long term financial objectives. At maturity, you will have a huge corpus to meet your needs.

Example : If your child is 2-3 years old and you start your monthly SIP today at an amount of say Rs.3000. You will get a lumpsum amount of Rs.25 lakhs approximately after 20 years when your child will pursue higher education. This is just an example based on an the average rate of return of 10%-11% over the period. In reality, you are likely to earn a bit of lower or higher return over the SIP period.

You can invest through the lumpsum mode as well.t But, in the present financial scenario, where the markets are highly volatile, SIP is considered as the safest mode of investing your money for long term. Hence, SIP is often referred to as one of the best methods of investing money to plan your Long Term Investments.

SIP can be started by Individuals of any age. But, the earlier you start, the better financial portfolio you can build to reach your goals. Early birds usually win, so be an early bird and plan your finance goals well in advance to reap higher benefits.

MAIN FEATURES OF SYSTEMATIC INVESTMENT PLAN (SIP) :

·         You contribute in the form of small amounts weekly, fortnightly, monthly or quarterly as per your convenience. e.g. You can invest Rs.500 per month also or Rs.2000 on quarterly basis.
·         You can choose from variety of financial instruments like mutual funds i.e. debt or equity.
·         These are best suited for long term wealth creation and fulfilling your long term goals.
·         The returns are based on how the funds have performed over the SIP period.
·         The Investment amount is fixed throughout the SIP period. You cannot change the regular SIP amount during its tenure.
·         You can open a SIP for say 5 years,10 years or 15 years period.
·         Post dated cheques or Bank ECS Mandate can also be given to Mutual Fund Companies in order to process your requests.
·         There is no lockin period in SIP which is a favorable point for the investors who don’t want to park their money in investments having long lockin periods like Public Provident Fund or National Pension Scheme. You can initiate as well as exit from SIP at any time. But, in case of money invested in ELSS minimum lockin period is 3 years.
·         You can also open SIP online through mutual fund companies websites. But,do check the authenticity and reliability of such sites.
·         You can also start SIP in ELSS.