All about Systematic Investment Plan - SIP
Systematic Investment Plan (SIP) is a popular and simple way to invest in mutual funds regularly and systematically. It allows investors to build wealth over time by making small, periodic investments.
1. What is SIP?
SIP is a disciplined investment approach where investors contribute a fixed amount of money at regular intervals (monthly, quarterly, lumpsum etc.) into a mutual fund scheme. This regular investing strategy helps in averaging out market fluctuations and benefits from the power of compounding over the long term. However, it is important to create a balanced SIP portfolio to ensure diversification and manage risk effectively.
2. How to Invest in SIP?
Investing in SIP is easy and straightforward:
Choose a Mutual Fund: Select a mutual fund scheme that aligns with your investment goals, risk tolerance, and financial objectives. Consider factors such as fund category (equity, debt, hybrid), fund manager's track record, and past performance.
Set Investment Amount: Determine the amount you want to invest in SIP regularly. You can start with as little as ₹500 per month, making SIP accessible to investors with varying budgets.
Select SIP Frequency: Decide on the frequency of your SIP investments, such as monthly, quarterly, semi-annually or lumpsum. Stick to a consistent schedule to benefit from rupee cost averaging and compounding.
Submit SIP Mandate: Provide standing instructions to your bank or mutual fund distributor to debit the SIP amount from your bank account on the specified date each month/quarter.
3. Risks Involved in SIP:
While SIP is a relatively safe investment strategy, it's essential to be aware of the following risks:
Market Risk: SIP does not guarantee returns and is subject to market fluctuations. The value of your investment may go up or down based on market conditions.
Inflation Risk: Inflation can erode the purchasing power of your investments over time. It's crucial to choose SIPs that offer potential returns higher than the inflation rate to preserve and grow your wealth.
Liquidity Risk: Mutual funds may impose exit loads or have lock-in periods, limiting your ability to access your funds immediately in case of urgent financial needs.
4. Benefits of SIP:
Despite the risks, SIP offers several benefits for investors:
Disciplined Investing: SIP instills discipline and regularity in your investment habits, helping you stay committed to your financial goals.
Rupee Cost Averaging: SIP allows you to buy more units when prices are low and fewer units when prices are high, averaging out your cost of acquisition over time.
Power of Compounding: By reinvesting returns, SIP harnesses the power of compounding, enabling your investments to grow exponentially over the long term.
Flexibility: SIPs offer flexibility in terms of investment amount, frequency, and fund selection, allowing you to customize your investment strategy according to your needs.