SIP or Systematic Investment Plan is a provision offered by Mutual Funds to its investors through which the investors can invest their part of the amount in a disciplined manner that is they can invest a fixed amount of their total part of investment at a fixed interval of time. The main aim behind the ideology of SIP was to benefit the investors with long-term investment plans and to avoid the burden of arranging a big amount for investment at a time.
In SIP or Systematic Investment Plan, the Mutual Fund companies allow their investors to deposit a small and fixed part of their big investment amount at certain time interval. SIP works on the principle of periodic purchasing units of the mutual fund.
SIP or Systematic Investment Plan benefits the investors in many ways.
- Professional guidance: If an investor is planning to opt for stock trading with timing, they require excellent market knowledge and a regular tracking market process to know its values. No doubt this method requires a lot of time investment from the investor. But if the investor invests on regular basis, he/she has not to worry about the right market values for investment and ends up saving their time.
- Rupee cost averaging: A key feature of SIP, also restricts the investor to track the market value on a regular basis. This feature lets a SIP investor buy more units when the market is low.
- Easy Operations: SIP is an easy and simplified process that can be monitored easily. They can also check their investments through updated statements of their accounts.
- Eighth Wonder: SIP benefits are calculated on the basis of compound interest which benefits an investor who starts investing early and invest regularly for a long period of time, in a very positive way. For example: below is given a graph that shows an individual’s SIP investment of Rs 1000/- per month for 30 years with three different compound interest rates that are 6% P/A, 10% P/A and 15% P/A. No doubt why compound interest is known as the eighth wonder of the world.
- Starting Early is key: The earlier an investor starts investing on a regular basis through SIP, the more benefits he/she earns which constructs a strong base for his wealth creation. Below is given a graph that shows the benefits of investing Rs 1000/- at 10% P/A compound interest through SIP at different stages of life till the retirement age.
In the above graph, we can see only five years of delay investment start creates a big difference in the benefit returns.
Rupee Cost Averaging is a key feature of SIP that reduces the risk in it and adds only the benefits to SIP. Being an investor, we always stand in the dilemma that when to invest in the market and when to withdraw our investment from the market. The result of this is we buy securities when the market is high and sell it when the market is low and ends up with a loss.
To avoid this dilemma an individual can go through Rupee Cost Averaging, where individuals invest a fixed amount of money at regular intervals irrespective of the fact whether the markets are high or low. And surprisingly the individual doesn’t end up with a loss. Instead, Rupee Cost Averaging ensures the individual that he/she buys more units when the market is low and buy fewer units when the market is high.
Let us try to understand the concept of SIP or Systematic Investment Plan through the example of an individual. Shayra#, a 23-year-old middle-class talented girl living in Patna started earning a good amount of Rs 30,000 at this very early age of hers. When she started to earn along with that she started to plan her secure future. Her dream was of owning a house with magnificent features, laced with new technologies, antique furniture and many more things. She shared her thoughts with peoples in her work area where she got the suggestion to invest through SIP in Mutual Funds. She then enquired about the best and trusted mutual fund firm in Patna where she got to know about Shri Ashutosh Securities Pvt. Ltd. After that, she went to the office of Shri Ashutosh Securities Pvt. Ltd. where she has explained the concept of investment through SIP very clearly and effectively. Different investment options were offered in which she chose of investing Rs 1000/- per month with 15% compound interest for 25 years.
After the completion of 25 years, Shayra’s total investment would be Rs 3,00,000 and now let us have a look at her investment returns. After 25 years now Shayra has a large amount of money in her hand that is enough for her dream house to get built. She is now happy and investing her saving of 25 years happily in her dream house construction.
Consider if Shayra would have not invested in SIP, and instead of it, she would have saved Rs 1000/- per month in her bank account for 25 years. Then if we calculate, her yearly saving will be Rs 1000*12=Rs 12000 and for 25 continuous years at the rate of 3%, it will be Rs 4,44,589 only. Now if we consider that Shayra would have taken a home loan then we can assuredly say that her whole life would end up in paying the interest rate on the loan only.
If we figure out the conclusion from Shayra’s story, then we can conclude that SIP or systematic Investment Plan is the best choice any individual can choose for the future investment plan. SIP requires a small amount investment at regular intervals, calculated with compound interest its benefit amounts are high, through Rupee cost averaging it ensures no loss in investment and also save investors time, are the key advantages related to SIP which makes it a best choice for any individual if he/she is planning for future investment.
(Mutual Fund investments are subject to market risk. Kindly read all the related documents carefully before investing. Illustrations are for example only, there is no guarantee of returns. Past performance is not a indicator / guarantee to future returns)