A Systematic Investment Plan (SIP) is an easy way to start investing in a mutual fund scheme. In a SIP, the investor invests a fixed amount of money every month. The amount of money invested may be small or big, but what is more important is to invest on a monthly basis.
The four major benefits of investing in SIP are as follows:
1. SIP helps you to reduce the average cost of purchasing the units by buying more units when the prices of units are down due to a downturn in the market or less units when the prices go up during an upturn in the market. Thus the highs and lows in the markets are evened out reducing the average cost of units, thereby enhancing the returns. This also helps avoid panic selling when the markets sell-offs.
2. SIP helps achieve your financial goals by setting aside on a regular basis the amount required for, say, buying a car or marriage or education of children. This inculcates a saving habit and financial discipline as the small amount set aside every month grows into a large corpus which helps you to achieve your financial goal.
3. SIP enables you leverage the power of compounding if started early on in life. The principal amount, along with the dividend/interest reinvested every year, helps your money to multiply at a faster rate.
4. SIP provides you the advantages of diversification as mutual funds invest in companies from various sectors such as manufacturing, pharma, banking, IT, metals, and many more. Such diversification enables you to derisk your portfolio of investment.