When it comes to investing in mutual funds, it makes enormous sense to do so via the ‘SIP’ or ‘Systematic Investment Plan’ route.
Are you wondering what exactly a SIP investment? In this article, you will learn everything you need to know.
SIP refers to a unique approach of investing in mutual funds where you commit consistent sums of money over a prolonged period of time.
This can be as little as 500 Rupees to as much as 50,000 Rupees, or even more, in a month. In fact, it doesn’t even have to be monthly; you can opt for a weekly sum, a fortnightly one, or perhaps even make a quarterly commitment.
Essentially, you call the shots with SIP investments.
Now, such an approach comes with a unique set of benefits. We highlight those benefits below – for your benefit!
A Disciplined Approach to Investing
There is no arguing the fact that prudent investments require enormous discipline. Now, especially when we are young, this kind of discipline is hard to come by. There is so much peer pressure to spend on all kinds of material objects that there is hardly any scope for savings that can be tucked away towards investments.
That is where small ‘SIP’ investments can eventually grow to make a big difference.
Even as a newbie just starting out on your first job, you can easily tuck away a small sum, say 500 Rupees as we mentioned above, each month. As you continue investing this over a prolonged period of time, you will see the amount grow, which will automatically create a disciplined approach to investing in yourself, in the long run.
Compounded Returns with SIP Investments
A big advantage with SIP investments is that they allow compounded returns.
Continuing the example we cited above, each 500 Rupee invested every month is added onto previous investments already made. The RoI or Return on Investment that you receive is on the sum total. You will earn on the sums invested plus the growth or appreciation it has witnessed.
Over time, this really can grow into a significant sum of money.
In a year, for example, while the total invested sum would be Rupees 6,000 that sum would have increased significantly, depending on the overall performance of the mutual fund in question.
Convenience is yet another factor we can easily associate with SIP investments. After all, larger sums of money are invariably harder to save – and therefore, harder to devote towards investments.
In contrast, smaller sums of money are fairly easier to invest with. In fact, over time, it becomes a matter of habit. The same way you allocate a certain sum of money for let’s say, weekend activities, is the way you would allocate money for SIP investments, without actually applying too much thought to the process.
Averaging Out Rupee Costs
Mutual funds have something called NAV or Net Asset Value. This is not a constant value but rather keeps fluctuating. As a particular mutual fund does well, its NAV goes up. A higher NAV would mean a relatively lesser number of mutual fund units which the same sum you have been investing would get you.
As a corollary, at the outset, mutual funds have low NAVs; in the initial stage when mutual funds are launched, most start off at just 10 Rupees. This is a stage when your money would be able to get you more units of the same mutual fund.
The bottom line is that there is considerable fluctuation in the number of mutual fund units you are able to purchase each time, in spite of investing the same amount of money.
Thanks to SIP investments, you can ensure that, eventually, the Rupee costs for these mutual fund purchases even out reasonably well.
When it comes to building a foundation towards a more secure financial future, SIP investments play a crucial role. So make sure you put in adequate effort towards investing this way! Remember, a little bit can go a long way over time.
If you are curious about other ways you can save or make extra money, check out these other tips! With the right information, you can secure a strong financial future.