SIP,this is a common word you often tend to hear these days.But,still many of us are either not aware or don’t have much time to bother about it.What exactly does a SIP mean?
Just narrating you a short and funny story relating to SIP : Few days back,my little niece came running towards me and said uncle is putting money in SHIP …..SHIP… “Its so easy he said ,I also want to put it there”. I went dumb struck and went there to clarify and look what I found …aww…my 3 year old sweet little niece who said SHHH instead of SSSS….was trying to say SIP.
For a little child,the unawareness is fine but for we mature people,it is really necessary to make ourselves aware and well equipped with all the methods of good financial planning.
So, feeling the importance and need to discuss about this topic,I have just tried to highlight the importance and benefits of SIP.
What is SIP or Systematic Investment Plan ?
SIP or Systematic Investment Plan is a method of investment where a fixed amount is invested into mutual funds at regular intervals. SIPs usually reap higher returns if investment is done for a longer duration.
Here,you should be aware that SIP is just a method or way of investing.
People generally get confused and consider SIP as some Investment product.But,it is not a product, fund nor any investment option.It is just a simple process or the way to invest your money in Mutual Funds.
Remember,the piggy bank where you used to put small amounts in your childhood days and get a lumpsum when required.Similarly,you can build a good investment portfolio by making small but regular contributions out of your monthly savings.
Remember,you can invest in mutual funds through the lump sum mode also,but here we shall be highlighting on SIP or Systematic Investment Plan and How to invest in mutual funds through the SIP route.
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 favourable 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. For details you can refer ELSS or Equity Linked Saving Scheme !
The procedure for investment in mutual funds has become much simpler than it used to be few years back.You get to explore higher returns while investing small and regular amounts based on market fluctuations.
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 :
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 less amount 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 your 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.
To get additional details on Financial planning,you must go through10 Financial Planning Tips to Follow in Your 20s !
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.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.
Hope you found the information useful !
You are most welcome to give your valuable feedback in the Comments section below.Do Share your experiences on the same, that might help someone in his investment planning.
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Enjoy Your SIP Journey !