• HDFC
• 28 Jun 2018
• Systematic investment plan SIP

HDFC, Tester

Systematic Investment Plan

 

A Systematic Investment Plan or SIP is an investment plan wherein you can invest a fixed amount of money in mutual funds at regular intervals. A pre-decided fixed amount of money will be invested through the entire duration of the investment period. This investment can be done on an annual, quarterly, or a monthly basis. That is for the investor to decide.

 

SIP is safer compared to a one-time lump sum payment when it comes to investing in a mutual fund. It allows you, the investor, to have greater control over the investment in terms of the amount you want to invest and the timing of the investment. Also, you have the option of withdrawing your investment in case of a financial emergency.

How does a SIP work?

As mentioned already, investing through SIP provides flexibility and convenience. It provides you with greater control over your investment. This has a lot to do with the way SIP works.

A fixed amount is automatically debited from your account, and this amount is invested in a particular mutual fund investment scheme. You will then be provided with a Net Asset Value which is basically a certain number of fund units at the prevailing market rate. Every time you add to your investment, you purchase more units of the mutual fund.

 

What are the benefits of SIP?

 

There are certain factors at play here that allow investors to enjoy the benefits of the mutual fund through SIP.

1. Rupee Cost Averaging: It is quite common for people to deride the idea of investment as a disguised form of gambling since investors are regularly caught in a guessing game. But with SIP, you are freed from the problem of speculation. Since you’re making regular investments, the volatility of the market will not affect the average cost per fund unit. You can purchase more units when the unit price is low, and fewer units when the price is high. This system of balance protects you from market fluctuations.
2. Compounding: If you continue making investments at regular intervals, your investments will accrue over time. This means that the more time you allow for your investment to grow, the better the gains. This becomes possible with the slow, steady and regular investment plan that comes with SIP.
3. Long-term gains: Due to the dual play of rupee-cost averaging and compounding, you stand to make long-term gains by investing through SIP. At the same time, you can protect your money from market fluctuations.
4. Regular and controlled savings: Investing through SIP forces you to ensure that a fixed amount of money is saved for regular investment. Consequently, you will find yourself taking a more disciplined and structured approach towards how you use and allocate your money for different purposes. This helps in developing a good saving habit.
5. Flexibility: As previously stated, one of the benefits of investing through SIP is that it provides you with greater flexibility compared to a lump sum investment. While it is advisable to continue with SIP over a long period of time, you can choose to discontinue your investment plan at any point in time. Also, you can choose to invest any time, for any duration period.
6. Convenience: All these factors and benefits point, ultimately, to something everybody seeks in every task they undertake: a certain amount of convenience. You can provide instructions to your bank to enable automatic debiting for your SIP in a mutual fund. This means you only have to worry about saving that fixed amount. Also, mutual funds are managed by experienced investment professionals, so even that aspect is taken care of for you.