To understand “Advantages of SIP”, let us first understand the term SIP. Why all financial planners recommend SIP as the best tool to invest in mutual funds? Why SIP is so popular among retail investors? What are the advantages of SIP?
What is SIP?
Systematic Investment Plan (SIP) is nothing but investing a fixed amount regularly in a mutual fund. It is similar to a Recurring Deposit in the bank or post office, the only difference being the investment is happening in equities or debt, as per your fund selection. If the markets are high, then you will get lesser units and if the markets are low, you will get more units. This will average out your cost per unit and will benefit in the long-term, when the market will rise. This is called Rupee cost averaging and has proved very useful to investors. Now we have monthly, fortnightly and even daily SIP to suit customer’s needs. You can start SIP with even Rs.500/- per month.
Advantages of SIP
It encourages disciplined savings
SIP is a tool through which you are putting your savings into regular investment. It ensures that you don’t over-spend if the money is lying idle in your account. It also works on the principle of Power of Compounding – the moment you save, your amount is invested immediately giving maximum time to your investments. Since, the savings is happening, by way of post dated cheques or through ECS, it will ensure compulsory savings and help you to live within your means.
Flexibility in investment
The process is simple,once you decide the fund and amount to be invested on a monthly basis. You can issue one cheque and opt for ECS from next month onward. You can do it with post dated cheques also.
You have the flexibility to withdraw from the accumulation in case of any emergency or can stop further SIPs, in case of any exigencies. Now you have daily, weekly SIPs also, but the most popular one is monthly SIP.
Volatile market is good for SIP investors
Let us see the past records. Sensex was at 20,000 levels in December 2007 and had a major crash in the following period. By June 2008, it was down to 13,000 levels and reached a low of 9,600 by Dec. 2008. Then it started the upward journey with many ups and downs in between and finally reached 20,000 levels in Dec. 2010. If you compare the gain in Sensex between this 3-year periods, it is NIL.
But the SIP investors in good mutual funds made an average return of 28% during this period, in a market which had not really grown on absolute terms. This is the power of investments through SIP. When the market was going down from 20,000 to 9,600 levels, lot of investors stopped their SIPs, and they lost these gains.
Don’t think that all mutual funds invest in equity market. There are debt funds and balanced funds too, to satisfy the needs of all types of investors. Don’t think of investing in equity mutual funds, if your goals are immediate, say within 3 years. It will take at least 7 years for an equity fund to deliver good returns.
Advantages of SIP – Conclusion
The best thing for retail investors is to start SIPs in good performing mutual funds. But please remember to invest in the best funds. If you cannot identify the best funds, go for advice from qualified persons. Be a disciplined investor and don’t stop SIPs, seeing the market volatility. In fact, this will help you to see your money growing.
What is your experience of investing through SIP? Please share.