What is a Systematic Investment Plan?

Also popularly referred to as SIP, Systematic Investment Plan is one of the smartest and worry-free ways of investing your hard-earned money into the fairly risky mutual fund market. With SIP, you can choose to invest a fixed, pre-decided amount into mutual funds at regular period of time, like weekly investments, monthly investments, quarterly investments or annual investments. SIP remains the most well-planned investment approach for anyone interested in slowly investing a smaller amount into mutual fund with an ambition to build a certain amount of wealth for the future.
Now that you have a fair idea of what SIP is, let’s get to know how exactly it works.
How SIP Works?
As discussed above, SIP is one of the easiest and smartest ways to invest your hard earned money. Under SIP, your investment money, pre-decided by mutual consent of you and your SIP provider, gets deducted from your designated bank account automatically and is invested into a pre-specified mutual fund scheme. As a SIP member, you are assigned with a certain units on the basis of the net asset value (NAV) of the mutual fund for the particular day.
So, each time you invest into SIP, extra units of mutual fund schemes are availed at the current market rate and applied to your SIP account. And because the mutual fund units are purchased at different market rates or NAV, you get to enjoy the umpteen benefits from Compounding and Rupee-Cost Averaging.
If you have just started investing in SIP and aren’t sure of what Rupee-Cost Averaging and compounding means, check out their quick definitions below.
. Rupee-Cost Averaging — We are sure that you will agree to the fact that most investors, including you, remain apprehensive about when to invest in order to get maximum returns owing to the volatility that’s prevalent in the markets. This is where Rupee-cost averaging comes to your rescue. As a regular investor, you get to purchase more units when the prices are lower and less number of units when the prices are higher. In addition, you get to get a lower average cost per unit, when the market is plagued by a really volatile period.
. Compounding — The rule of the game called compounding is simpler than it sounds. The concept of compounding works on the fact that the earlier you start investing, the more time you get to grow your wealth.
Let’s take an example to understand compounding a little better. Let’s assume you are 40 years old and have started investing Rs.10000 monthly with a purpose to save. So, in the next 20 years, you will be able to save Rs.24 lakhs. Now, let’s say your savings are stipulated to grow by an average of 7%. This means you will be able to save Rs. 52.4 lakhs in the next 20 years.
But here’s the catch. If you had started saving Rs.10000 monthly when you were 30, you could be able to save Rs.36 lakhs over 30 years and get to grow the amount to Rs. 1.22 Cr in 30 years with an average yearly growth rate of 7%. This is clearly more than double of what you could save if you started a little early. So this is how compounding works.
Now that you know what Rupee-Cost Averaging and Compounding are, it’s time to get acquainted with some of the major benefits of SIP.
Systematic Investment Plans Benefits
. Huge Savings — What is the key to huge savings? The answer is simple — disciplined and smart investment. SIP allows you to save regularly and invest your savings to help you achieve your future financial objectives.
. Convenience — Most people shy away from investing because of the hassles and lengthy paperwork that is included. But with SIP, you can invest your money in a hassle-free manner. The money is auto-debited from your bank account and is invested in the best and most lucrative mutual fund options.
. Flexibility — SIP allows you to opt out of it any time you wish to. In addition, SIP is flexible enough to allow investors to increase or decrease the investment amount at their discretion.
Conclusion
All in all, SIPs remain the best and most ideal investment for any investor who wants to invest slowly but steadily with an ambition to multiply their wealth many times over, in a pre-stipulated period of time.
