Benefits of Systematic Investment Plan (SIP)

Posted on | February 11, 2011 | No Comments

What is SIP ?

A Systematic Investment Plan (SIP) lets you invest in small amounts in mutual fund on a regular basis. It gives you a lot of flexibility and is a very convenient way of building a massive corpus over a period time. In mutual fund terminology, SIP grants the investors to invest a fixed amount each month or quarter for purchasing additional units of the scheme at NAV based prices.

Also, your investments benefit from rupee-cost averaging. Let us explain it. If you invest an equal amount of money each month in a mutual fund, you are engaging in rupee-cost averaging. Share prices change from day to day, so the set amount of money you invest purchases different amounts of shares each time. When prices are high, NAV is high – so you get less. And when prices are low, NAV is low – so you get more. In the end, if you were to purchase all units at once you risk getting less your money. If you are lucky enough, you would get more. But for that you would need to be an expert. So, in the interest of an average investor, a SIP ensures that the chances of losing out o an investment are spread out and thus minimized.

Let’s take an example. Suppose an investor Rs. 1000 under the Systematic Investment Plan on a monthly basis. Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market has turned downwards.

So, how does a SIP operate?

An investor can invest a fixed amount each month for at least 6 months or more through post-dated cheques or through auto debit artefact in choose centers. Investors are adviced to indicate their choice on their application form in the box provided for the purpose. The post-dated cheuqes should be dated the 5th/ 15th/ 25 of each month. This will make it simple for you to keep a track of your regular contributions

Benefits of SIP:

1) It’s an expert’s field. Let’s leave it to them
Management of the fund by the professionals or experts is one of the key advantages of investing through a mutual fund. They regularly carry out extensive research – on the company, the industry and the economy – thus ensuring informed investment.

Secondly, they regularly track the market. Thus for many of us who do not have the desired expertise and are too busy with our vocation to devote adequate time and effort to investing in equity, mutual funds offer an captivating alternative.

2) Putting eggs in different baskets
Another advantage of investing through mutual funds is that even with small amounts we are healthy to enjoy the benefits of diversification. Large amounts would be required for an individual to achieve the desired diversification, which would not be doable for many of us.

Diversification reduces the overall impact on the returns from a portfolio, on statement of a loss in a particular company/sector.

3) It’s all transparent & well-regulated
The mutual fund industry is well regulated both by SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India). They have, over the years, introduced regulations, which ensure smooth and transparent functioning of the mutual funds industry.

This makes it safer and convenient for investors to invest through the mutual funds.

4) Market timing becomes irrelevant
One of the biggest difficulties in equity investing is WHEN to invest, apart from the other massive question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when.’

SIP is a disciplined investing irrespective of the say of the market. It thus makes the market timing completely irrelevant. And this day when the markets are high, it might not be prudent to commit massive sums at one go.

With the next 2-3 years looking good from Indian economy point of view, one can anticipate handsome returns through’ regular investing.

5) Does not strain our day-to-day finances
Mutual funds grant us to invest very small amounts (Rs 500-Rs 1,000) in SIP, as against larger one-time investment required, if we were to purchase directly from the market. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an saint investment option for a small-time investor, who would otherwise not be healthy to enjoy the benefits of investing in the equity market.

6) Reduces the average cost
In SIP we are investing a fixed amount regularly. Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging.

Generally, we would stay away from buying when the markets are down. We generally tend to invest when the markets are rising. SIP works as a good discipline as it forces us to purchase even when the markets are low, which actually is the ideal time to buy

7) Helps to fulfill our dreams
The investments we make are finally for some objectives such as to purchase a house, children’s education, marriage etc. And many of them require a massive one-time investment.

As it would usually not be doable raise such massive amounts at short notice, we need to build the corpus over a longer period of time, through small but regular investments. This is what SIP is all about. Small investments, over a period of time, result in massive wealth and help fulfill our dreams & aspirations.

Hi I am Nikhil Naik the Founder and CEO of www.naikwealth.in, Mumbai, India. We are one of the leading investment advisor which offers wide portfolio of Mutual Fund, Life & General Insurance, Systematic Investment Plan (SIP), NRI services.

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