A Systematic Investment Plan (SIP), commonly called SIP, is a method of investment offered by mutual funds to its investors for disciplinary investment. SIP Mutual Fund facility allows its investor to make investment of a fixed sum at pre-defined and regular intervals in the chosen mutual fund plan.
A simple definition of what is SIP mutual fund is that it is a professionally managed fund, which pools investment from a large number of investors to invest in the capital asset. In such mutual funds, the capital collected by different investors is invested in purchasing companies stocks, shares or bonds. The professional fund managers collectively manage the mutual fund investment with an objective to create the highest possible returns on investment. SIP aids in growing money via compounding interest, ensuring higher rates of returns on maturity.
Let’s take a look at what is a SIP mutual fund in a gist.
In mutual funds, money is pooled from various investors and is invested in the different market-linked securities.
All mutual funds are regulated by Securities Exchange and Board of India (SEBI).
It provides access to large portfolios.
SIP Mutual funds offer higher returns as compared to the conventional investing option.
It provides an option to invest in a small amount.
Investing in SIP mutual fund is one of the most lucrative ways for wealth creation. However, it is very important to consider the expertise of the fund manager while choosing the fund.
SIP Investment Plan works on the concept of “Save First, Spend Next”. Through SIP investment, the investors can invest a fixed amount at a regular interval of time like weekly, monthly, or quarterly instead of doing one-time investment. Let’s take a look at the reasons, why you should invest through SIP?
Start with a Minimum Investment of Rs.500: The investors can start investing in SIP mutual funds with a minimum amount of Rs.500. Moreover, in SIP investment there is no upper limit set on the maximum investment limit. By investing a pre-fixed amount as per one’s convenience, the investor does not feel any burden on the budget and can increase the monthly installement by a factor of 15%.
Power of Compounding: With the benefit of the power of compounding the investors can gain interest on the invested amount over a long-term period. This results as a larger return on investment in the long-term as compared to the one-time investment.
Inculcates the Habit of Discipline: SIP investment plan helps to inculcate the habit of discipline among investors as they are required to invest a fixed amount of money regularly at specific intervals of time. Moreover, with the option of automatic payment, the investors cannot skip the investment as the money gets automatically deducted from the bank account.
Rupee Cost Averaging: Mutual fund investment is volatile in nature. However, in SIP investment with the help of rupee cost averaging the investors can buy more units when the market is low and less units when the market is high as a result of this, the investors can reduce the overall cost per unit.
Acts as an Emergency Fund: With a simple process of withdrawal, SIP plan investment can work as an emergency fund in the can of any contingencies. Moreover, through SIP investment, investors can create wealth over the long-term period and can fulfill their financial objectives of life.
Most of the time, the investors who are new to the market often get confused between SIP investment or one-time investment. However, to sort out their confusion, here we have briefly discussed both the investment option.
One-time Investment
In a one-time investment, the investors need to invest a lump-sum payment during the tenure of investment.
The one-time investment earns better returns on investment at the time when the market performs high.
The One-time investment can result in a loss at the time of market fluctuation.
SIP Investment
Sip investment includes period investment, where the investors can invest a fixed amount per month in the fund option of their choice.
SIP investment earns better returns on investment at the time when the market performs low
With the benefit of rupee cost averaging SIP, investment helps to deal with the market crash
The investors can get all the information related to various mutual funds online. However, before making an investment, certain aspects should be kept in mind.
Duration of SIP: The duration of SIP mutual fund investment is an important factor to consider from point of view of risk, return, and tax. While making an investment through SIP, the investors should keep a reference point of 5 years and check how the fund performance across the market.
Fund House: It is very important to check the reputation of the fund house before choosing a plan. The performance of the fund house will give investors an estimation that how well the fund houses will be able to handle the market lows and highs without letting the investors feel the impact.
Rs.500 Cr Asset under Management: Rs.500Cr. asset size can be considered as an appropriate benchmark while choosing the fund. However, it doesn’t mean that the funds below this asset size are bad, but it may not perform as good as the funds above this asset size.
Rough calculations or an approximate calculation can be dangerous when you are planning a particular financial goal to achieve. It is always best to make a foolproof financial plan and work with real numbers while operating towards your short-term or long-term financial objectives.
A systematic investment plan helps you achieve these goals sensibly by making you invest in a mutual fund scheme of your choice. And in return, it manages your investment portfolio. You can start investing even in best SIP plan in India with a minimum of Rs. 500. So, by investing even a minimum amount in SIP, you can fix a time period to achieve your goal.
Tax benefits are only applicable to the investments made in Equity Linked Savings Schemes (ELSS). If one invests in ELSS, government-approved tax saving scheme, they can claim tax deductions under section 80C of Income Tax Act, 1961.
Disciplined Investing Approach-
A disciplined investment routine plays the most important role when aiming for high returns. Investing in mutual funds via an SIP helps maintain the regularity of the investments and helps the investors - attain their financial objectives.
Offers the Benefits of Rupee Cost Averaging-
Rupee-cost averaging allows investors to invest pre-determined amounts regularly, either quarterly or monthly. So, instead of investing a lump-sum, one can make gradual investments at particular intervals of time over a long period of time. Rupee cost averaging minimizes the need to study and time the market. During market fluctuations, the rupee cost averaging method allows the investors to achieve a lower average cost per unit.
Convenient, Simple and Easy to Monitor-
SIP investment plans are a hassle-free mode of investment. One can issue instructions to banks to facilitate the option of auto-debits from the bank account. A SIP investment is an ideal investment option for retail investors who can’t go for active investments.
Power of Compounding-
The most appropriate way to create wealth is to invest regularly and to start investing as early as possible. A small amount invested on a regular basis can ultimately double over a long period of time. With the benefit of the power of compounding, one can stay invested in the plan for a longer tenure and can create wealth in the long-term.
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