What is SIP?
Systematic Investment Plan (SIP) is a smart and disciplined way of investing in mutual funds. With the help of SIP, you can choose to invest a pre-determined amount at regular intervals, which could be monthly, quarterly, half-yearly or annually. You can start the SIP by investing as low as ₹1,000 on a monthly basis. Few asset management companies (AMCs) can give you the option to invest in SIP by even ₹500. This disciplined mode of investment is appealing as it can instill a habit of savings and build wealth for the investors to feed in the future.
How to Invest in SIP?
You just need to choose a mutual fund scheme that has an objective attuned to your financial goals and risk-taking capacity. After finding the scheme of your choice, you can choose the SIP mode of investment by ticking the same in the application form. You also need to indicate the SIP amount and the interval of investment in the form. After the successful registration, the SIP amount will be debited automatically from your bank account and invested into the scheme of your choice. Upon investment, you would be allocated a specific number of units at the prevailing net asset value (NAV), also called as the market rate. With each investment, additional units are purchased at a NAV applicable on a particular date. In this way, units are purchased at different rates, giving investors an opportunity to avail benefits of rupee cost averaging and power of compounding.
What is Rupee Cost Averaging?
Most investors tend to be jittery while investing their money in a volatile market. Thus, they look to time the market. This is where rupee cost averaging comes to the equation and eases the situation for the investors. So, when the prices are low, your investment buys more units. While at the time of surging prices, a lesser number of units are bought. This pattern of unit purchase allows you to reduce the average cost of investment per unit.
What is Power of Compounding?
Most of you must have come across the term ‘compound interest’ while studying mathematics during the school days. With compound interest, you not only earn interest on the invested principal amount but also on the interest accrued. This leads to a jump in the value of investment over time. For the power of compounding to take a full effect, it is imperative you give your money an extended length of time to grow.
For example- If you start investing in an equity mutual fund through a monthly SIP installment of ₹5,000, the investment value can reach to ₹10.3 lakhs in 10 years, assuming an annual return of 10%. The actual amount invested in this case stands at ₹6 lakhs, giving you a net gain of ₹4.3 lakhs. At the same rate of return, you can raise the investment value to ₹38.3 lakhs on a total investment of ₹12 lakhs in 20 years. This results in a net gain of ₹26.3 lakhs. So, from the illustration, it can be said that money grows faster with an extended period.
DISCLAIMER – Mutual Fund investments are subject to market risks. Please read all the scheme related documents carefully before investing.