Systematic investment plans (SIPs), which have seen tremendous growth in popularity, have drawn investors looking for a more structured approach to stock market investing in recent years. SIPs allow you to regularly invest in mutual funds by allocating a set amount of money, typically once a month.
Meaning of SIPs: A systematic investment plan is an investment strategy in which a shareholder contributes a set sum of money to a mutual fund regularly. It is a methodical approach to investing and aids investors in harnessing the power of compounding. Investors can invest as little as Rs. 500 per month in SIP plans, making it an appropriate investment choice for even novice investors.
SIP benefits:
- Investment strategy with discipline: SIPs encourage investors to make regular investments, which is one of their main benefits. By resisting the temptation to time the market, which can be harmful to their investment returns, investors are better able to maintain their discipline.
- Power of compounding: SIPs give investors the chance to benefit from compounding. Making interest payments on interest is referred to as compounding. Investors can earn returns on both their principal investment and the returns made on earlier investments by regularly making mutual fund investments.
- An affordable investment: SIPs let investors start with a small sum of money. This enables small investors who cannot afford to make a lump sum investment to choose it as an affordable investment option.
- Diversification: SIPs give investors the chance to spread their portfolios among various asset classes and investment philosophies. Consequently, the risk of losses brought on by the performance of a single asset class or investment strategy is decreased.
- Flexibility: Flexibility in terms of investment duration and volume is possible with SIPs. It is entirely up to investors how much money they want to put aside and for how long.
How SIPs work:
- SIPs function logically and simply. To participate in a SIP, an investor must give their bank permission to deduct a set sum from their account regularly—typically once per month. After that, this money is put into the mutual fund of their choice.
- The investor is given mutual fund units according to the current Net Asset Value (NAV) of the mutual fund. Investors can purchase or sell mutual fund units at a price known as the NAV. The NAV can also be used to determine the best mutual fund to invest now.
- The mutual fund makes a variety of investments with the money it receives from investors, including stocks, bonds, and other securities. Following that, investors receive returns on their investments in proportion to their mutual fund investments.
- Depending on the investor’s investment objectives, SIPs can have a range of durations. The investor has two options after the investment period is over: they can either redeem their investment or extend the SIP for another period.
In conclusion, SIPs are a great investment choice for those looking for a disciplined and organized method of stock market investing, to sum up. In addition to a disciplined approach to investing, the power of compounding, accessible investment, diversification, and flexibility are just a few advantages they provide. SIPs are simple to set up and conveniently managed via web portals or mobile applications.
