In a nutshell, a SIP is a tool to create wealth systematically. It allows investors to invest some predetermined amount on a regular basis. The investments can be made monthly, weekly or quarterly in a mutual fund of the investor’s choice. If you wonder how SIP works in mutual funds, you can consider them as recurring deposits. The main difference is that the SIPs would be invested in a mutual fund scheme at a specified deposit and not in a bank deposit. Also, the investments made through SIPs are subject to market risks.
How do SIPs work?
A SIP is a regular investment that can help attain long-term objectives by building wealth over time. Investing in a SIP investment plan is very simple. After the investment interval has been chosen, the money would get debited automatically from the bank account at regular intervals and get invested in a mutual fund scheme. You would be allocated a certain number of units according to the ongoing market, also termed as the Net Asset Value (or NAV) of the fund. Units are bought at this market rate and added to your account every time.
SIPs offer financial discipline
Given the nature of investing, SIPs offer financial discipline and creates regular saving habits. It allows investors to invest regularly without thinking about market sentiment and index level. If you were to invest separately every month, you would need to worry about timing the market. You might even think about postponing your investments. SIP puts an end to these worries. The money is invested in schemes at regular intervals.
Rupee-Cost Averaging
If you are wondering how SIPs generate wealth even without timing the market properly, it has got to do with averaging out the cost at which units of a mutual fund are purchased. The stock is volatile, has always been and would continue to be so. It reflects the condition of the economy. An efficient investor would buy at lows and sell at the highs. He would be buying more units at lower prices and fewer units when the prices are high. Through a SIP, you would be mirroring this style. This is how SIP works in mutual funds.
How are SIPs beneficial?
First of all, you would learn more about disciplined saving through a SIP. By investing through SIP, you would be committing to saving regularly. Every investment would take you a step closer to your financial objectives. Also, the process of investing through a SIP is quite hassle-free. You could be instructing your bank to facilitate auto-debit from your account. You can visit the website of the fund house and choose the fund you want to opt for. The benefits of compounding and rupee-cost averaging are also there. Also, you would not worry about timing the market.
So whenever you invest through a SIP, you win. The longer you invest, the greater corpus you would create.
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