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What should you know SIP?
What should you know SIP?

A systematic investment plan or SIP is a mutual fund investment scheme that allows you to spend a fixed amount at regular intervals in a mutual fund portfolio that you can choose.

The SIP investment method allows you to choose an automatic withdrawal scheme by which a fixed amount is withdrawn on a daily/monthly/quarterly/semi-annual basis from your savings account and is directed to the preferred mutual fund program.

How does it work?

SIP works on a simple investment-consistency model. It operates as a regular investment of a stipulated sum, which is withdrawn at fixed intervals directly from the bank account of an investor.

Once the investor pays the SIP sum, the mutual fund house allocates you with several units of the portfolio in which you have chosen to invest, based on the Net Asset Value (NAV) of the plan for that day. With each SIP payment, the participant receives additional program units.

Since each time the plan units are bought at different rates, with the same amount of SIP being invested at regular intervals, the money of the investor gets him or her fewer units of the mutual fund scheme during the increase in the market and more units during a falling market.

Therefore, a SIP helps you to reduce the average cost of your investment and reduce the risk of your investment by lowering the average purchase price over time. This is known as rupee cost averaging.

However, if you invest in SIP, it helps you to regularly raise your invested amount by a fixed amount and get the advantage of compounding while you receive returns on the returns your investment makes. This is called the power of compounding.

Advantages of SIP

The small amount required: A SIP helps investors to start investing in mutual funds at a value as little as INR 500. Thus, the investment mode of SIP is secure on investors ' wallets. The low investment situation also eliminates the financial hazard associated with lump sum investments.

Power of Compounding: If you invest in a SIP, an investor at frequent and fixed intervals raises his or her investment by a specific amount. Through holding the dividends accumulated along with the principal amount, an investor also gets returns on the returns received under the investment feature of the SIP.

Low risk: Equity and debt mutual fund investment instruments that are risky due to changes in the stock market and the economy. Therefore, an investor buys fewer units of a mutual fund with the same amount of money when the market is down, and more during bearish markets. Thus, by spreading the purchase price over time, a SIP helps an investor to reduce the average cost of investment and the risk associated with that.

Automated process: An investor can apply for an automatic deduction from the SIP. To do this, you need to provide your bank with a one-time order to make your SIP payments, and your money will automatically be invested in the scheme at the periodic interval you want. It saves you from the trouble of filling unnecessary forms and documentation and issuing cheques or logging on digital platforms every time you make a SIP contribution.

The best SIP to invest in depends on market conditions and it is best to seek advice from a professional wealth manager to lower your risk.

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