A Systematic Investment Plan (SIP) is a method of investment that allows you to invest in a disciplined and strategic manner. This method is generally adopted by investors who’re keen on parking their money in mutual funds. Many mutual fund platforms allow investors to contribute small amounts periodically for several months. This investment strategy is more convenient than investing a lump sum amount at one go.
An SIP also offers numerous other benefits to investors. Here are some reasons why an SIP strategy may just be the best way for you to invest for the long term.
Compounding involves reinvestment of the interest that you earn on your investment. This simple trick allows you to turn a relatively small investment into a significantly large corpus. The SIP strategy allows you to smartly utilize compounding to multiply your return on your investments, even if they’re as low as Rs. 1,000 each month.
When you opt for a systematic investment plan, you are required to make regular contributions over a period of time. The interest earned on these contributions is reinvested again, thereby enabling you to earn exponentially higher returns. In order to maximize the benefit of compounding, it is advisable to get yourself a trading account and an online demat account and start investing as early as you can.
If you are investing in volatile assets like the stocks in the equity share market, the chances of a stock’s prices plummeting after you’ve purchased it are high. If you invest all your funds at the same point, you may be forced to buy high and sell low, thereby sustaining huge losses. On the other hand, with a systematic investment plan in place, you can actually lower the average cost of purchasing equity shares over a longer period of time.
For instance, if you wish to invest Rs. 1,000 in the equity market by following the lumpsum investment strategy, you may be able to purchase 10 shares of Rs. 100 each. On the other hand, if you decide to invest the same Rs. 1,000 systematically over the course of two months, you can purchase 5 shares of Rs. 100 each today, spending Rs. 500 at the outset. And assuming the price of the share falls to Rs. 50 each the following month, you can purchase 10 shares for the remaining Rs. 500. This essentially brings the average purchase cost of each share to around Rs. 66.
More often than not, the more you earn, the more you tend to spend rather than save. In fact, saving money systematically is an exercise that requires a great deal of determination and discipline. And by simply subscribing to a systematic investment plan, you can cultivate the habit of investing in a disciplined manner.
A share trading account allows you to cultivate this investment habit, since you can choose to invest a specific sum each month instead of randomly infusing more funds into it. A Systematic Investment Plan also gives you complete freedom with regard to selecting the date of investment. You can utilize this to your advantage by choosing an investment date that is closer to the date you receive your monthly income. This way, you can prioritize investment and saving over spending.
Most investors follow the strategy of saving up a sizable amount and then investing it in a financial instrument like a mutual fund. Often times, this strategy may not be the most ideal way to invest, since the money you save up for investment could often get spent for meeting other requirements. It also means that the money that you save up is forced to stay idle till the target corpus is reached.
A systematic investment plan, on the other hand, allows you to start off with small investments. The amount of investment can then be increased gradually as your income grows, so it aligns with your financial ability. In addition to this, there’s also the element of compounding, which can help you quickly achieve your financial objectives.
Identifying the right entry point is commonly known as timing the market. The practice of timing the market is incredibly hard to get right, particularly when you’re dealing with a highly volatile environment like the share market. It may work for some trades and fail for others, and the chances of getting it wrong are extremely high.
However, with a systematic investment plan, you can circumvent this problem entirely. Thanks to the ability of a Systematic Investment Plan to average the cost of purchasing your financial assets, you don’t have to worry about timing the market at all. SIPs ensure that the cost of purchase is always kept in check, irrespective of the stock market’s performance.
In addition to investing in mutual funds using a Systematic Investment Plan, you can also invest directly in equity. In order to invest in direct equity and other financial assets, you need to open an online demat account and link it to a share trading account. A demat account holds your shares electronically, while a trading account allows you to buy and sell shares, futures, options, and other financial assets.