A Systematic Investment Plan or SIP is a planned mode for investing money in mutual funds. SIP allows you to invest a pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.). SIP inculcates saving habit and building wealth for the future. SIPs have proved to be an ideal mode of investment for retail investors who do not have the resources to pursue active investments. An SIP is generally preferred for an equity scheme and can be started with as small as Rs 500 per month.
The biggest advantage while investing through SIP is Rupee Cost averaging. With volatile markets, most investors remain skeptical about the best time to invest and try to ‘time’ their entry into the market. Rupee-cost averaging allows you to opt out of the guessing game. Since you are a regular investor, your money fetches more units when the price is low and lesser units when the price is high. SIPs may make the volatility in the market work in favour of the investor.
SIPs also help in availing benefits of compounding. This means, the earlier one starts an SIP, longer the investment horizon, larger the benefits. Reason being, each rupee once invested earns a return, now this return plus initial money adds up to earn a greater return, allowing your investment to grow at a faster pace. Higher rates of return or longer investment time periods increase the principal amount in geometric proportions. This is the most important reason for investors to start investing early and keep on investing on a regular basis to achieve the long-term financial goals.
SIPs provide the best path to disciplined savings. Discipline is the key to successful investments. When you invest through SIP, you commit yourself to save regularly. Every investment is a step towards attaining your financial objectives. However with this disciplined approach, one also has the flexibility in investments. Although it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase/ decrease the amount being invested.
Also, SIP is a great way of investing because of the convenience it provides. You can issue a standing instruction to your bank to facilitate auto-debits from your bank account. It is a complete hassle-free mode of investment