SIP stands for Systematic Investment Plan. It is a kind of recurring deposit wherein you invest smaller amount periodically in Mutual Funds instead of a heavy amount at one time. This facility allows you to invest in MF without altering your other financial liabilities.
The success of SIP depend basically on two concepts- concept of rupee cost averaging and power of compounding.
The best part of SIP is that it enables an individual to get into the habit of investing
The features of SIP
Rupee cost averaging
While an individual is sceptical about the timing of entering into the equity market, the facility of SIP takes out this hesitation and allows to enter at any point of time irrespective of the condition of market. When market is down the SIP amount allows you to buy more no of units for same amount of money.
Power of compounding
This is the second most important factor to be considered while investing through SIP. Market experts always suggest to start investing early. This is because of power of compounding. The more you stay invested in the market, the more you earn.
Being disciplined in investing makes you earn more in long run. SIP is a committed way of regular investment. Every investment is a step towards attaining your financial objectives.
Most Flexible way of investment
Unlike the recurring deposits, SIP allows you to start stop the investment at any point of time and allows you to either increase or decrease the value of your investment. Thus it is more attractive for the users.
Returns over Long time period
Because of the Rupee cost averaging and power of compounding, the SIP has an ability deliver over long run. The investor can expect a huge amount over a period of say 30/40 years.
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Ease of investment
SIP makes the investment easier. The investor has just to give the standing instruction to the bank about the amount to be transferred to SIP through ECS. Or individual can also give the post dated check to the bank equivalent to number of investments in SIP.
Investing in smaller amounts may not seem attractive, but it enables the investing/saving. And builds up a large sum of amount over a period of time. Even the cash rich people need not worry about the timing of the market and the investment. The Rupee cost averaging gives an edge to the investments made without timing the marketing.
At last, let’s consider an example:
Person A and Person B (both 25 years of age) invest in diversified equity (Mutual Fund) fund which has given 12% (assumption) of return on an average for last 5 years.
A starts investing Rs. 5000/- at the age of 25 years. Whereas B waits for right time to invest and starts investing when he turns 30 years. By this time, A already has a corpus of around Rs 4,00,000/-. Both A and B continue investing for another 20 years. After 20 years A made around Rs. 94,00,000/- and B made around Rs. 50,00,000/-
The above example clearly shows the Rupee cost averaging and power of compounding in favour of A. Delay of 5 years in hope of right entering time made B lose almost about Rs. 45,00,000/-
So, don’t worry about the timing of the market and keep investing through SIP to achieve your financial goals.