Everyone talks about how the best way to invest in the financial market is through SIPs. Yes, it is true. In fact, from April 2014 to March 2019, SIP investments in equity funds provided annual returns of 10.26%, according to an NJ Wealth study. Even during the COVID-19 crisis, many are going the SIP route.
But before you decide to start investing in systematic investment plans, here are some things you must know.
What is SIP?
Some people think that SIP is an investment product. However, that’s not the case. SIP or systematic investment plan is the manner of investing in mutual funds. In case of SIPs, you make small but regular investments, rather than making a lumpsum payment. This makes growing your wealth over a period a lot easier on the pocket.
There are broadly four types of SIPs:
In this type of plan, you can change your SIP amount according to your cash flow. So, in case you are facing a cash crunch, you can reduce the amount or even skip a payment. Similarly, if you have made some financial gains, you can increase the SIP amount. Generally, an option to alter the SIP amount is provided seven days before the SIP investment date.
In a Top-Up systematic investment plan, the SIP amount is increased at regular intervals. These plans allow investors to increase their investments in mutual funds that are performing well.
Generally, in a SIP, you make investments each month for a pre-determined period. But with perpetual SIPs, you get the option of not entering the end date of your plan. With this, the investor can redeem the investment whenever their financial goal has been achieved.
These SIPs are suited for those investors that have a good understanding of the financial market. For starting this SIP, you can set an event, index level, or NAV.
What are the Benefits of SIP?
Some of the reasons why SIPs are so attractive for investors are:
With SIPs, investing in mutual funds becomes extremely easy. You do not need to have large funds. The best SIP plans allow you to start with as little as ₹500. Investing small amounts regularly is particularly convenient for salaried individuals. There are also auto-debit options, meaning that the amount will get deducted automatically at a particular date each month from your account.
Rupee Cost Averaging
Rupee cost averaging reduces the risk factor associated with investing. In case of SIPs, more units are bought when the market is down, while fewer units are purchased in case the market is up. This leads to the cost of each unit is lower because of averaging.
With SIPs, you can also leverage the power of Compounding. Compounding helps you in achieving a bigger corpus over time. With SIPs, the returns are also added to the principal. This means that interest in the next month is then earned on the principal sum plus previously accumulated interest.
SIPs can be extremely beneficial for investing in all types of mutual funds, including liquid funds and equity funds. But their returns are dependent on market performance and are not guaranteed. So, before investing, research thoroughly.