A Systematic Investment Plan (SIP) is one of the safest ways to invest in a mutual fund, especially if you are a first-time investor. For the uninitiated, SIP is a financial instrument that allows you to invest a fixed sum of money in mutual fund schemes in small amounts at periodic intervals instead of a lump sum. You can figure out its popularity by the fact that there are 50.5 million SIP accounts in India currently!
If you are still apprehensive about putting your money in SIPs, here are five solid reasons why you should.
Habit of Saving
When you invest in SIP, a fixed amount gets deducted from your bank account on a weekly, monthly or quarterly basis as per the frequency you have chosen. This auto-debit system ensures that you never forget to save money. It ensures compulsory and regular savings.
Low Investment Amount
Whether you are a newly employed person, student or housewife with limited income, you can still start a SIP with a minimum amount of Rs. 500. It is a good option for even amateur investors looking for equity investment without risking a massive amount.
Power of Compounding
The concept of compounding refers to the interest earned on the interest from an investment vehicle. If you start early and stay invested in SIP for the long term, you can benefit from the power of compounding and create a significant corpus over a period. The more SIPs you can add to your portfolio, the more time you have on hand to create wealth. You can use a SIP goal calculator to understand the power of compounding and calculate the returns.
SIP gives you the flexibility to increase the amount midway through the investment cycle. You can even change the frequency. Let’s say, you started SIP with Rs. 500 every quarter and continued it for two years. If you want to increase this amount to Rs. 1000 and change the frequency to monthly from the third year onwards, you can do so effortlessly. You can even make additional purchases in your SIP portfolio.
However, do note that it is not possible to decrease the amount in SIP. In such a case, you will need to cancel the SIP and start a new one with a smaller amount.
Less Vulnerable to Volatility
SIPs are less prone to market fluctuations. You can easily stay invested in any market cycle and navigate through volatility. When markets fall, you get more units at the same prices. When markets rise, you get more value as you have extra units on hand. In a nutshell, SIP acts as a shock absorber and gives you a rewarding opportunity to invest in the best equity mutual funds throughout any market ups and downs.
SIPs are a great option for investors who have a low-risk appetite, lack time to manage their investments, or do not possess the necessary expertise to evaluate the market. If there are still any doubts in your mind or you want to invest in SIP with an expert’s help, it is advisable to get in touch with a registered stock market broker or an advisory firm.