By The Buyt Team
To enjoy a hot cup of coffee, you sip it and not gulp it down. Similarly, to enjoy what you earn for a long time, you need to SIP it. Systematic Investment Plan or SIP is a way of investing where you commit to paying a fixed amount every month towards a mutual fund scheme of your choice. No one has to remind you, or you don’t have to remember any dates to make payment. You choose a date and activate SIP with your bank, and every selected day of the month, a fixed amount is debited from your account and allocated towards your investment.
How do SIP works?
SIP investment gives a chance to invest a small amount over time rather than investing a one-time huge amount. The SIP amount can be of as low as Rs 500 and can go up to the level you want to invest. Every time you make a SIP payment, you are allocated the units of mutual funds depending on the Net Asset Value (NAV) of a mutual fund. With each SIP payment, additional units keep getting added to your account depending on the market rate. With every investment, the amount gets reinvested – and the cycle goes on.
Let’s take an example wherein you make a SIP payment of Rs 500 every month for ten years. The expected return from the scheme is 10%. After ten years one has invested Rs 60,000 earned a return of Rs 43,276 on the investment. So after investing Rs 60,000, the corpus you create after ten years is Rs 1,03,276.
Benefits of SIP
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Financial Discipline- Once you commit for a SIP investment, there are no excuses. Your contribution will not be dependent on our willingness or ability. There is no room of forgetting it because once you start the investment, a fixed amount gets debited automatically.
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Ease of Investing- You don’t have to wait for a large amount of money to accumulate to start investing. It is not a lumpsum investment. You need to decide the amount that you are comfortable with and start investing. As small as Rs 500, every month is good enough.
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Market Fall- On the downturns of the market, you will be tempted to discontinue. But for meeting long term goals, you should stick to the plan of contribution. You will get the advantage of rupee cost averaging on the value of units. When markets fall, you will accumulate more units, and when markets are at highs, you will earn fewer units averaging cost per unit.
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Power of compounding- Little drops make the mighty ocean- this holds for SIP investment. You stagger your investment over the years. As your investment grows, the return is compounded over the years.
Systematic Invest Plan (SIP) are an efficient way to start your investment. If you are a beginner and not comfortable with tracking market movements, then SIP’s can be a good start. SIP helps in developing a habit of regular investment and gives you the ease of starting with a small amount.
