Systematic Investment Plan (SIP) is a method of investing an exact sum of money, on a regular basis in a mutual fund scheme.
Mutual Funds are nothing but professionally-managed investment schemes operated by banks or other fund management companies which bring together a group of people and invest their money in stocks, bonds and other securities.
This type of method allows an investor or a buyer to accordingly invest or buy units on a specific date of each month. This is done so that the said person can put into action a saving plan for themselves.
By far, one of the biggest plus points of this method is that the investor need not time the market. Hence, instead of timing the market, investing recurrently will make certain that one is fully invested at the highs and lows and make the most excellent of an opportunity that is difficult to predict in advance.
Here are a few advantages of this type of method:
- No need to time the market.
- Closely controlled and disciplined approach to investments
- Lighter on the wallet.
- The earlier you start the more benefits you gain.
- Flexibility to the method, the investor can discontinue at any given time.
HOW DOES IT WORK?
- The required amount is automatically debited from your bank account and is invested in a specific mutual fund scheme.
- You are then allocated a particular number of units, whose rate is based on the ongoing market rates of the day. This is termed as NAV or Net Asset Value.
- So each time you invest money, supplementary units are purchased (based on the market rate) and you, the investor can benefit from two powerful investment strategies:
- Power of Compounding:
This follows the basic rule: the sooner you start investing, the more time your money has to grow.
- Rupee Cost Averaging:
Due to the instability of the market, most investors are usually unsure of the right time to invest. This strategy allows no room for such doubts. Because of the regularity of your investment, your money buys more units when the price is low and vice versa.
There are three basic types of SIPs:
- Monthly SIP: This is a traditional way of SIP investment in the Equity Mutual Fund. It is also one of the best options for people with stable and secure salaries. This type allows the investor to choose any date between the 1st-10th of the month at his or her convenience.
- Daily SIPs: In this type, the money is funded towards the investment on a daily basis. This is usually suited for small traders and other such occupations. A minor disadvantage might be that small loss may occur.
- Flexi SIPs: in this method, the money can be invested on a daily or monthly basis. The investor is capable of modifying the amount to be invested each month which is not possible via mutual funds.
This method of investment helps you save a small amount of money every month. It also helps you inculcate discipline in your saving habits and at the end; you end up amassing quite a fortune.