What is SIP?
A Systematic Investment Plan (SIP) is a facility provided by mutual funds to the investors to invest in a disciplined manner. SIP facility makes it possible for an investor to invest a fixed amount of money at intervals from the mutual fund scheme that is selected.
The fixed amount of cash can be as low as Rs. 500, while the pre-defined SIP periods can be on a weekly/monthly/quarterly/semi-annually or annual basis. By accepting the SIP path to investments, the investor stands to profit from the long-term due to average breaking and power of compounding and invests into a time-bound way without worrying about the market character.
How Can SIP WORK?
Every month/quarter a particular amount (determined by the investor at the beginning of SIP) is deducted from the investor’s bank account and spent in the chosen mutual fund scheme.
Each time the amount is invested, units of this strategy (according to NAV) are allocated to the purchaser.
Your investments average out that the market ups and downs resulting in averaging, your cost because your investment number gets broken down in equal payments.
The Investor can redeem (withdraw) units or switch to a different scheme. Anytime he/she wants to do so. (Please assess the strategy related documents as some mutual funds will have a predetermined lock-in period).
BENEFITS OF SIP?
When you invest during SIP and pay for the long run, the compounding impact magnifies the advantages. Compounding effect helps to ensure that you earn returns not just on your main amount (real investment) but also on the gains on the main amount i.e. your money grows over time since the money you invest earns yields. And the returns bring in returns.
SIPs may be started by as little as 500 monthly. You are able to select the frequency as monthly or quarterly.
As your investments are broken down into smaller, routine investments achieve your fiscal targets that are long-term. SIPs provide independence from being out to time the industry.
SIPs inculcate area which makes you invest a fixed sum consistently. You can construct a corpus over a period of time to achieve your financial targets, by beginning early, even with a small amount.