Demystifying SIP: A beginner’s guide to systematic investment

Summary:

SIP is a reliable vehicle to help you fulfil your financial aspirations. Wealth accumulation takes time, especially when it comes to long-term returns. With a proper understanding of SIP, mutual funds and the market conditions, investors can incur substantial gains. 

A systematic investment plan or SIP has become the ride or die for those wanting to invest money in mutual funds. It has become popular as an effective tool to access mutual fund portfolio in a disciplined yet flexible approach to build wealth over time. This blog will emphasise on how SIP works and its benefits, covering everything you would want to know before implementing this investment strategy. 

What is SIP?

SIP is a method of investing in mutual funds. It allows to invest a fixed amount of money at regular interval of time. These intervals could be weekly, monthly or quarterly based on your convenience. More often, investors prefer investing on a monthly basis. SIPs enable access to financial markets with advantages such as flexibility, convenience and the power of compounding. 

How does SIP work?

Let’s take a stepwise approach to understand how SIP works – 

• Choose your mutual fund – the first step is to select a mutual fund that aligns with your investment goals and risk tolerance. There is a variety of funds such as equity, hybrid, debt and more.
• Fix an investment amount – Determine how much money you want to invest in the chosen mutual fund scheme. The amount can be as low as 500 rupees which makes it accessible to most investors.
• Select the frequency – Decide whether you want to make these investments weekly, monthly or quarterly.
• Automatic deduction – After setting up your SIP, the chosen amount will be automatically deducted from your account, enabling automated investment. 
• Generate wealth – Over time, these investments accumulate and grow, thanks to the power of compounding. The returns on your initial investment start earning gains of their own, accelerating your wealth over long term.

Why choose SIP?

In recent times, SIP has gained tremendous popularity owing to the numerous advantages it offers: 

• Rupee-cost averaging – SIP minimizes the impact of market volatility. When the market goes down, SIP will buy more units and when it goes up, these investments buy fewer units. Over time, this may results in lower average cost per unit. 
• Discipline – SIP enforces financial discipline. It compels you to fixed amount regularly irrespective of market conditions. This helps reduce the temptation to time the market, which is generally risky.
• Accessibility and affordability – You don’t need to invest massive amounts of money. SIPs let you begin even with a small amount and eventually boost your investments. 
• Power of compounding – compound interest is the eighth wonder of this world. SIP harnesses this power by reinvesting the returns, allowing your wealth to grow exponentially. 
• Flexibility – You have the liberty to start, stop or modify your SIP at any time without incurring notable penalties. 
• Professional management – Mutual funds are managed by experts. The professional insight will improve the probability of success of the investment decisions made on your behalf. 
• Diversification – Mutual funds involve investment in a diversified portfolio of stocks, securities and bonds to reduce risk, unlike investing in individual securities. 
• Tax benefits – Certain mutual fund schemes such as the Equity-Linked Savings Schemes (ELSS) under Section 80C of the Income Tax Act assures promising tax benefits. 
• Risk mitigation – Due to diversification and professional management, mutual funds are better equipped to mitigate risks as compared to individual stock investments. 
• Goal-oriented investing – SIPs can be easily customized to align with specific financial goals such as education, retirement or buying a house. This helps you stay focused on your objectives. 
• Transparency – Mutual funds provide regular statements and updates on your investments, ensuring accountability and transparency. 

Key considerations 

While SIP is a great way to invest in mutual funds, there are some key points to remember:

• Select the right fund – It is absolutely essential that the mutual fund your choose is in line with your risk tolerance and financial goals. Study the fund’s performance in the past before you invest. 
• Monitor your investments stringently – Regularly review your investment portfolio to ensure it aligns with your financial objectives.
• Practice patience – SIP is a long-term investment strategy so it is given that immediate results are not going to happen. Be patient and stay invested to reap long-term benefits of compounding. 
• Things can go south – SIP does not guarantee returns. The value of your investments is impacted heavily by market conditions. 

Wrapping up SIP investments

SIP is an excellent way to reinforce financial security. It is simple, accessible, flexible, not to mention affordable. Additionally, it offers the potential to generate substantial returns over time, given you have the patience to do so. The key is to start early and stay disciplined as it takes you closer to making informed investment choices. True to any other investment, SIPs are subject to market risk. Nonetheless, you can elevate the chances of success with thorough market research and analysis. As long as you have clarity regarding your investment horizon, financial goals and risk appetite, you can effectively leverage SIPs.