What Should You Now About SIP Investments

by Shashank Bhaskar Finance Adviser

A systematic investment plan or SIP is debt mutual funds investment scheme that allows you to invest a fixed sum at regular intervals in a mutual fund portfolio that you can choose.

The SIP investment system allows you to select an automatic allocation mechanism by which a fixed sum on a daily/monthly/quarterly / semi-is withdrawn from your savings account and is directed towards the desired debt fund scheme.

How does it work?

SIP works on the simple model of the constancy of investments. It works like a recurring investment of a specified amount, which gets taken directly from an investor's bank account at fixed gaps.

Once the investor pays the SIP amount, the mutual fund firm allocates you with a certain number of units of the plan you have opted to invest in, depending upon the plan's Net Asset Value (NAV) for the day. With every SIP payment, the investor gets added units of the plan.

Since each time the plan units are bought at different prices, with the same amount of SIP being invested at regular intervals, the money of the investor gets him or her fewer units of the mutual fund scheme during the rising markets and more units during falling markets.

Thus, a SIP allows you to minimize the total cost of your investment and reduce the risk of your investment by spreading the purchase price over time. This is known as rupee cost averaging.

Additionally, if you invest in SIP, it helps you to continuously increase your investment sum by a fixed amount and get the advantage of compounding, while you receive returns on the returns your investment makes. This is called the power of compounding.

Advantages of SIP

Small amount required: A SIP helps investors to start investing in debt funds at a value as little as INR 500. Thus, the investment mode of SIP is accessible on investors' wallets. The low investment situation additionally decreases the financial hazard linked with lump sum investments.

Power of Compounding: If you put in a SIP, an investor at frequent and fixed intervals increases his or her investment by a sum. Through holding the dividends accrued along with the principal amount, an investor often obtains dividends on the returns received under the investment model of SIP. This is called power of compounding.

Low risk: Debt funds invest in debt investment tools which are erratic due to stock market and economic shifts. Thus, with the same amount of money, an investor purchases fewer units of a mutual fund when the market is bullish and more during bearish markets. Therefore, a SIP lets an investor decrease the average cost of his or her investment and the hazard linked with it by extending the purchase price over time. This model is called rupee cost averaging.

Automatic practice: An investor can opt for an automated SIP deduction. For this, you will have to give a one-time request to your bank for making your SIP payments, and your money will get invested in the plan automatically at the regular interval chosen by you. This saves you from the trouble of submitting forms and doing redundant documentation and issuing cheques every time you make a SIP investment.

The best SIP to invest depends on the market scenarios and to lower your risk, it is best to seek the advice of a reputed wealth manager.