Systematic Investment Plan or simply known as SIP works on the principle of regular investments. It is like your recurring deposit where you invest in a fixed base petty amount after every define period and on a regular basis. It allows you to invest in a MF by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 1000 each in place of a one-time investment of Rs 10,000 in an MF. Thus, you can invest in an MF without altering your other financial liabilities.
While making small investments through SIP may not seem appealing at first, it enables investors to get into the habit of saving. And over the years, it can really add up and give you handsome returns.
SIP has brought mutual funds within the reach of an average person as it enables those category having tight budgets to invest Rs 500 or Rs 1,000 on a regular basis in place of making a heavy, one-time investment.
Even for the cash-rich, SIPs reduces the chance of wrong investment decision. However, the true benefit of an SIP is derived by investing at lower levels. Other benefits include:
1. Discipline
The best rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not affect your monthly disposable income. You will also find it easier to spare a few hundreds every month, rather than set aside a large sum for investing in one shot.
2. Power of compounding
Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding.
3. Convenience
This is a very convenient way of investing. You have to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one’s account and will send the confirmation for the same.
4 Rupee cost averaging
This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share (or per unit) over time. This strategy is called 'rupee cost averaging'. People who invest through SIPs capture the lows as well as the highs of the market. In an SIP, your average cost of investing comes down since you will go through all phases of the market, bull or bear.
5. Other advantages
· There are no entry or exit loads on SIP investments.
· Capital gains, wherever applicable, are taxed on a first-in, first-out basis.