A Systematic Investment Plan (SIP) is one of the most popular methods to invest in securities such as mutual funds. In an SIP, you invest small amounts of money regularly in a mutual fund of your choice instead of making a one-time lump sum investment. From compounding to flexibility, here are all the reasons to start an SIP today.
- Allows you to start small
The best thing about SIPs is that you can start investing as little as Rs 500. So, you don’t need to have a huge amount of investible surplus to access different asset classes such as equity, debt, gold, etc. With an SIP, you can begin building your investment portfolio with small amounts of money over time. This kind of accessibility is unique to SIPs. Also, when you commit small amounts, you may find it easier to explore different mutual funds and learn the ropes of investing along the way without feeling like a lot is at stake.
- Offers flexibility
When you start an SIP, you can choose the amount of the monthly contribution, the frequency of the contribution, and whether you want it to increase over time. You can also choose the period for which you want your SIP to continue or let it be perpetual. In addition to this, you can also choose to stop your SIP at any point or skip it for a month in case you do not have the money for it. In this case, you simply need to inform the Asset Management Company (AMC) or investment platform in advance.
- Provides the benefit of rupee-cost averaging
Rupee-cost averaging is a benefit of an SIP that does away with the headache of timing the market and reduces the risk of market volatility. Since you invest a fixed amount of money at fixed intervals irrespective of the market price of the units, the cost of your overall investment gets averaged over time. When the price is high, fewer units are bought and when the price is low, more units are purchased. This way, short-term market fluctuations are ironed out and the return on your investment is enhanced over the long term.
- Facilitates compounding
Compound interest or compounding is essentially making your money work for you. Through compounding, your interest earns more interest, and this cycle continues to help create a significant amount of wealth in the long term. For compounding to be effective, you need to keep your money invested for a long time without withdrawing it. When you invest through an SIP, you get to make the most out of the process of compounding.
SIPs have several benefits but simply starting an SIP is not enough. You need to decide which type of mutual fund you want to start an SIP in. Each mutual fund comes with its own investment objective and risk level, which you need to go through carefully before you start. Once you decide which fund to start an SIP in, you can use an SIP calculator to decide how much money you should contribute to meet your different financial goals.