Systematic investment plan (SIP): Disciplined method of long term wealth creation
BLURB: SIP in mutual fund allows individuals to invest at regular interval and create wealth in long term, reducing timing risk.
We have our meals at least twice a day. We expect our kids to study every day. We are always told to exercise regularly. Though we are paid once in a month, we have to work five or six days a week. You cannot have a ‘six-pack’ body by working out once in a while. Most students cannot secure good marks in the exam by studying once in a blue moon. Being regular is the way to success. If it is true, then why it should not be the case with investing?
Welcome to the concept of systematic investment plan. Put simply, you sign for a series of investments at a pre-defined frequency in a mutual fund scheme. It helps you save at regular interval as per your convenience and build a large corpus over a period of time. Since most of us earn monthly income, the more popular form of SIP comes in the form of monthly investments in mutual fund schemes wherein investors allow mutual funds to collect prescribed sum on a particular date from the saving bank account and invest in mutual fund scheme. You can have a daily, weekly, monthly or quarterly SIP, depending on your cash flows. Before we jump into the benefits of SIP, let us see how it works.
Here is a typical case*. You have chosen to invest Rs 10,000 per month. The NAV or net asset value (fair price) of the unit keeps fluctuating as the market fluctuates. Thus during the year, you would have invested at both lower and higher points, allowing you to average your per unit investment cost. Assume that over a period of 12 months, the NAV has increased by 10%. However, your overall investment cost would have been Rs 9.84 per unit due to cost averaging. This has ensured that you enjoy better absolute return of investment of Rs 12.37%. Put it straight, you could take more money home.
*For illustration purpose only.
With this example in mind, let us understand the benefits of SIP:
Rupee cost averaging: The phenomenon of reducing the average unit price in a volatile market through investments spread over a period of time is called rupee cost averaging. Over a period of time as the markets go up you stand to make money.
Convenience: You choose the frequency of your investments and the amount of investments. With as little as Rs 500 per month, you can start your journey of long term wealth creation. You can enrol for an SIP online in minutes or by signing an SIP form. No need to fill and sign forms each month. It is automated and keeps you in the loop when each transaction is carried out.
Disciplined approach to ride market volatility: You remain committed to your investments plan. Irrespective of market volatility, your investments keep buying units. With fall in NAV due to market fall, you get to buy more units. This discipline pays you in long term as market gains.
Power of compounding: As you invest in small amounts at regular intervals for long term, power of compounding works in your favour.
Marrying SIP with financial goals: If you attribute each of your SIP to your financial goals, you can track your progress towards achieving your financial goals. Keep saving and you will be home.
SIP thus can be a key to your long term wealth creation and financial freedom. Mutual fund investments can be rewarding for disciplined investors and the best way to do it is through systematic investment plan.