Why is SIP a Good Investment?
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 and allows you to contribute small amounts periodically for several months. This investment strategy is more convenient than investing a lump sum amount in 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.
Benefits of Power Compounding
Compounding involves reinvestment of the interest that you earn on your investment which 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.
When you opt for a systematic investment plan, you are required to make regular contributions over time. The interest earned on these contributions is reinvested again and 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.
You can average out your purchase costs
Investing in volatile assets like stocks, the chances of the prices plummeting after you’ve purchased them 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. With a systematic investment plan in place, you can actually lower the average cost of purchasing equity shares over a longer period of time.
You cultivate the habit of investing in a disciplined manner
It is a fact that the more you earn, the more you tend to spend rather than save. In fact, saving money systematically is an exercise 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, 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. This way, you can prioritize investment and saving over spending
It’s a more affordable investment strategy
Most investors follow the strategy of saving up a sizable amount and then investing it in a financial instrument like a mutual fund. Often, this strategy may not be the most ideal way to invest, since the money you save up for investment could often get spent on meeting other requirements.
A systematic investment plan, 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.
You need not worry about timing the market
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. 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. 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 for which, you need to open an online Demat account and link it to a share trading account. A deamat account holds your shares electronically, while a trading account allows you to buy and sell shares, futures, options, and other financial assets.