SIP Investments Simplified For You

SIP Investments Simplified For You

04 Apr 2019

We are witnessing a virtual renaissance of sorts coupled with a paradigm shift as regards the approach of the common investor in investing his / her hard-earned money, compared to what the situation was, say 10 years ago, or even as recently as 5 years ago.

The proliferation of financial education / literacy programmes and the emergence of several reputed corporates leading from the front in establishing themselves firmly as knowledge disseminators or purveyors of well-researched and incisive information or data on financial instruments / markets have largely contributed to this trend.

Backed by solid independent research and with the help of astute qualified certified financial planners, investors today have displayed a willingness to move away from traditional investment sources such as real estate, gold and fixed deposits towards market-related instruments such as direct equity and mutual funds.

Typically, all investments in equity provide a reasonable opportunity to the investor to earn higher inflation-beating returns and create adequate wealth for achieving financial goals in life. However, a word of caution here – keep your risk tolerance in mind and see if you have the temperament and the conviction to navigate through the market volatilities. Also, avoid lump sum investments as you may be exposing your capital to the market vagaries. This is where the concept of Systematic Investment Plan (SIP) comes into the picture. We will dwell upon this at length in the paragraphs below.

A Mutual Fund Systematic Investment Plan is an investment vehicle for investors, allowing them to invest small amounts, periodically and systematically instead of lump sums. The frequency of investment is usually weekly, monthly or quarterly. But Monthly and Weekly SIP's are the most common or popular among investors.

In SIPs, a fixed amount of money is debited from the investor’s bank account periodically and invested in a specified mutual fund. The investor is allocated a number of units according to the current Net Asset Value (NAV). Every time a sum is invested, more units are added to the investors' account.

This strategy claims to free the investors from speculating in volatile markets vide the method of Rupee Cost Averaging. As the investor is getting more units when the price is low and fewer units when the price is high, in the long run, the average cost per unit is supposed to be lower.

The SIP culture attempts to encourage disciplined investments. SIP’s are flexible and the investors may stop investing in a plan anytime or may choose to increase or decrease the investment amount. The SIP route to investing is usually recommended for retail investors who do not have the resources to pursue their investments actively.

Benefits of investing in SIP:

  • Convenience - You can invest in a disciplined and phased manner using SIP. It allows you the convenience of starting your investment with as low as Rs. 500.
  • Rupee Cost Averaging – There is no need to time the market. Buy more units when markets are low. This reduces your overall cost of investment.
  • Power of Compounding - Compound Interest ensures better long-term benefits or returns compared to a one-time or a lump sum investment.
  • Relatively higher returns than FD’s - As compared to the conventional FDs, ELSS gives higher returns, which can efficiently beat inflation.

Now that we have understood the benefits of SIP investing, let us now shift our attention to some salient points which you need to know.

Always stick to your plan -

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  • The entire exercise of making money is pointless if you will not consider investments in both good and bad times. Investors are currently entering the markets when the valuations are high.
  • Subsequently, their SIP returns would turn negative if there is any correction in the market over the next year or so. That is when they will need to stick to their SIPs. Always continue with your SIP for the entire tenure and link it to a long term goal. Any fall in the markets in the interim should not lead you to stop your SIP.

Continue investing or don’t stop in a haste -

  • If investors want their investments to do well, then they need to continue with their SIP’s even through bear market phases. If investors exit, they could end up with negative returns.

The benefit of rupee cost averaging -

  • Here, the investors get a good average price because they purchase fewer units of a scheme when the price is high and more units when the price is low. The most important aspect for SIP investors is a long term approach that helps them to earn an attractive rate of return over the long term.

Duration matters -

  • The probability of making a positive return increases with the duration of the SIP. Systematic Investment Plan requires consistent investment, discipline and a lot of patience even during bad times.

We can conclude that the Systematic Investment Plan (SIP) is a smart financial planning tool that helps you to create wealth by investing small sums of money every month over a period of time. Investing during the early stages of life lets you enjoy the benefits of two powerful strategies - rupee cost averaging and the power of compounding.

To conclude, give a thought to considering SIP’s in your long-term wealth creation journey.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.