When you receive your salary every month, just saving is not enough. That money has to be invested so that it can earn you more money. A Systematic Investment Plan (SIP) also called `the good EMI’ helps you do just that.
SIP is a method of investing a fixed sum, regularly, in a mutual fund scheme. It allows an investor to buy units regularly on a specific date of the month. If you invest through SIP it can work wonders for your financial goals.
Let us look at how you can benefit by investing in SIP
1) Rupee cost averaging
In SIP, a particular amount is auto-debited at fixed intervals regardless of the share price/NAV. Due to this, an investor automatically buys more units when markets are low and vice versa thus averaging the cost of purchase over time. This can go a long way in minimizing the effects of investing in volatile market.
2) Flexibility
The investor has the freedom to decide the amount, period and interval of SIP as per their convenience. They can also increase, decrease or stop the SIP anytime.
3) Diversification
SIP investors can have diversification among mutual funds depending upon their financial goals and risk tolerance. It follows the principle of don’t put all your eggs in one basket. This diversification often helps in minimizing the risk for the investor. They can have multiple SIPs of different amount for different time frames to suit their short, medium and long term goals. Similarly they can invest in different types of fund.
4) Helps you to meet financial goals
SIP helps you to get closer to your goals in a systematic and disciplined manner. An investor may have multiple SIPs, where each SIP investment is linked to a particular goal. This allows the investor to tune each investment aggressively or conservatively depending on return expected. For example if you have a goal to by a car in a year or two, the amount of investment required to meet that goal can be quantified easily. Thus, the investor can choose the right fund to achieve this goal.
5) Disciplined investing
Disciplined investing is necessary to build wealth in long term. Systematic investing is a disciplined plan that makes it easy to invest automatically. Investing regularly in small amounts can often lead to better results than investing in a lump sum. Your saved money will be utilized to build wealth, thus, saving you from spending your savings unnecessarily. For example, a monthly SIP of Rs.5,000 for a period of 20 years can build a corpus of 66 lacs at CAGR of 15%.
6) No need to time the market
Some people time the market to invest in stocks. However, timing the market requires extensive market knowledge, research, technical analysis and a lot of time from your end. Further it could also be risky. SIP eliminates the need to actively tracking the market and hence, you can stop worrying about when and how much to invest.
7) Benefit of compounding
It takes drops of water to make the mighty ocean. The small amount that you start investing today will help you build a big corpus. Regular investment helps in creating a substantial amount of wealth which includes your own contribution, plus returns compounded over the years. Start early to reap the maximum benefit.
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