Systematic Investment Plan (SIP) is a very popular term promulgated by mutual funds, their distributors, and financial planners. SIP is the connotation for Systematic Investment Plan which is generally marketed as a safe and sure route of investments in equities to outperform the markets and create wealth over the long term. SIP is certainly safe for mutual funds and distributors because they get committed continuous money for the long term on which they can earn fees and commissions.
What is a SIP?
SIP is nothing but a systematic regular investment plan, mostly monthly or quarterly, of a particular amount in a mutual fund scheme. It is similar to a bank recurring deposit. It allows an investor to deposit small amount at regular periodic intervals in place of a single heavy one-time investment.
Advantage of Investing through SIP
The major benefits of investing through SIP route are as follows:
Lower average cost per share:
This is supposed to be the primary benefits of investing through the SIP route which has made it so popular among investors. What is the cardinal principle of buying anything in this world – buying when the price is low. Rupee cost averaging simply does that by automatically buying more when the price is low and purchasing less when the price is high. This is the primary advantage of a SIP on which it is being sold and marketed
Removes emotion from the decision to invest:
SIP regularizes investments by making it a mechanical boring process which is what it is supposed to be. It removes human judgment from the decision making process. It instills discipline in the investor and helps him stay focused, investing regularly for the long term.
Great investment growth and wealth building tool:
Some term compounding as the “eight” wonder of the world and it really is. Very few people realize how powerful compounding is over long periods of time – small items compounded regularly over longer periods yield big difference in the final results. For example, Rs.5000 invested monthly at a 10% p.a. return over a 30 and 35 year period would accumulate to Rs.1.13 crores and Rs.1.90 crores, respectively – a massive difference of Rs.77 lacs. Hence, just by starting 5-years earlier, a person would ultimately be able to accumulate Rs.77 lacs more – that is the power of compounding.
Short-term fluctuation doesn’t harm as much:
If the price goes down by 10 % in the next month. You have a consolation that you are also buying at reduced price too. And if the market recovers to previous level, you actually make money overall.
SIP route to save taxes:
In every ELSS, you can do a systematic investment plan (SIP) with an ECS mandate so that every month a fixed sum of money is deducted from your account and invested in the plan. For this, all you need to do is fill up the forms for investing in an ELSS once, along with an SIP form and the bank mandate form.