Investors new to the investing world have plethora of questions related to investing. What is the best way to invest in mutual funds? What is SIP? What is lumpsum mode of investment? What are the benefits of investing through SIP mode of investment? Often new investors confuse SIP with mutual funds, assuming that these investment products are interchangeable. However, they cannot be more wrong. SIP or systematic investment plan isn’t any investment product. Rather, an investment tool that allows investors to invest in mutual funds. Hence, one does not invest in SIP, rather invest in mutual funds through SIP. Now, that we have cleared the most common yet most widely misconstrued concept about SIP investment, let’s understand if you should go forward with SIP route of investment.
What is SIP?
SIP allows individuals to allot a predetermined sum of money at regular intervals in their desired mutual fund schemes. The predetermined amount of money gets debited from the bank account of the investor on the specified date and is used to purchase mutual fund units at the prevailing NAV of mutual fund or net asset value of the fund. Let’s understand the working of SIP with the help of an example. Maria wishes to buy a new phone which is estimated to cost Rs 60,000. However, she does not have the entire amount handy with her currently and decides to invest in mutual funds through SIP mode of investment. She invests Rs 5,000 per month in her desired mutual fund scheme for a year. By the end of the year, she would not have only invested the entire amount of Rs 60,000 but also earned potential yields on the schemes she buys each month.
What are the benefits of SIP?
There are several benefits of SIP mode of investment. Here are a few benefits of SIP mutual fund:
- SIP mode of investment has a very low minimum investment amount of just Rs 100 per month. This makes them quite affordable for individuals belonging to different economic backgrounds.
- SIP investments are quite flexible in nature. An investor has the liberty to change the frequency of their investments, the SIP investment amount, tenure of the investment, the mutual fund scheme they wish to invest in, etc. before and even during an investor’s SIP investment journey.
- SIP investments are automated in nature. What this means is that a specified amount would automatically get deducted from an investor’s bank account at specified intervals for a given period. This helps to instill financial discipline among investors which is required when investing in the markets.
- SIP investments also allow investors to enjoy the benefits of the power of compounding. Compounding allows investors to earn substantial yields on their investments.
- SIP investments also benefit investors through a concept known as rupee cost averaging that averages out the cost of mutual fund units purchased over a period.
- SIP also eliminates the need to time the markets. Rather, an investor must focus on time in the market.