Systematic Investment Plan (SIP)in mutual funds allow investors to invest a fixed sum of money periodically in mutual funds. The most common type of SIP is the monthly SIP where on a specific date of the month, a pre-defined sum of money is invested in the Mutual Fund of your choice. Also do keep in mind that while the SIP amount is fixed, the NAV (Net Asset Value) of mutual fund units varies on a daily basis, you with SIP transaction, you will end up purchasing different number of units. This feature is what provides the various benefits of SIP that we will discuss next.
1. Rupee Cost Averaging
Rupee cost averaging is a concept wherein you purchase a higher number of units when the Net Asset Value of a fund is low and a lesser number of units when NAV is high. Essentially this benefit of SIP ensures that the cost of purchasing mutual fund units averages out over the tenure of the tenure of the SIP. You do not have to worry about how to time the market if you are investing through SIP and this is one of the key benefits of SIP investments.
2. Power of Compounding
Compounding happens when the returns on the investments you made start earning returns. This is a simple concept, but its practical applications are substantial. With regular investments through SIPs, your returns can also get reinvested. With the passage of time, this results into a snowball effect, which increases the potential returns multiple times. An ideal way to maximize the gain is to invest for an extended period. This is also one of the benefits of SIP, wherein you can benefit by investing as early as possible.
3. Flexible Investment Amount
One of the key benefits of SIP over lump sum investment is that you can choose to invest in mutual funds through SIP, with just Rs 500 every month. This is an affordable way to invest monthly, without hurting your wallet. You can also increase the number of monthly investments with a rise in your earnings via the Systematic Investment Plan step-up feature. Additionally, there is no limit to the number of SIP or mutual funds you can invest in at the same time. This is how the SIP investment strategy can help reach investment goals faster.
4. Convenient Investment Method
Another advantage of SIP is that it is a convenient way of investing. Even if you may not be able to find time for extensive market research and analysis to time markets, SIP investments will happen automatically. So, once you choose a good fund, you can just give standing instructions to the bank and the monthly SIP will be deducted automatically so that your never miss out on an investment opportunity.
5. Disciplined Savings
Systematic Investment Plans involve regular usually monthly investments being made into a mutual fund of your choice. On the one hand, this ensures that you develop a habit of saving money, on the other hand, you are better placed to make your money grow over time by staying invested in a market-linked investments that has the potential to beat inflation. While other investments like recurring deposit can also help inculcate a habit of saving, the potential of mutual funds to generate inflation-beating returns are an advantage that is not available with many other investments.
6. Flexible Investment Tenure
Another benefit of SIP is the flexibility you have with respect to investment tenure. Some mutual funds might need you to make a minimum investment of 6 SIP installments. However, there is no limit on how long you can continue making systematic investments into a fund.
This flexibility to keep investing via SIP for as long or as short a time as possible is not available if you are making lump sum investment in mutual funds.