- Cost-effective: SIPs have lower investment thresholds and do not charge any entry or exit loads, making them a cost-effective investment.
- Rupee cost averaging: SIP allows you to buy more units when the market is low and fewer units when the market is high. This helps in averaging out the cost of investment over the long term.
- Long-term wealth creation: SIP is ideal for long-term wealth creation as it helps in generating compounding returns over a period of time.
Let’s continue by gaining an understanding of what SIP (Systematic Investment Plan) means. SIP is a way to invest in mutual funds in small amounts on a regular basis. You can do this weekly, monthly, or quarterly instead of investing all at once or in a lump sum.
This article covers:
- Benefits Of SIP In Mutual Fund – Advantages of SIP
- How To Start SIP Investment?
- SIP Benefits- Quick Summary
- SIP Benefits- FAQ
Benefits Of SIP In Mutual Fund – Advantages of SIP
Start With a Small Amount
You can invest in mutual funds with a starting amount of just ₹500 in regular monthly installments, and you can later increase the amount as per your budget and financial goals. Therefore, you can start your investment journey with a small amount and earn a substantial amount in the future.
Accumulation of Wealth
Compounding helps you accumulate more wealth and earn higher returns through SIP because you are earning returns not just on the installment amount but also on the earnings that you are getting from the mutual fund. In other words, the compounding effect will work and give you a good amount of money if you remain invested for a long period of time and start investing as early as possible.
Let’s see an example to understand how compounding works in the SIP. Suppose you are investing in three mutual funds X, Y, and Z with an equal SIP of ₹1,000 for different time periods that will provide an annual average return of 12%.
| Mutual Fund | Monthly SIP | Time Period | Total invested amount | Estimated Returns | Total wealth amount | Returns |
| X | ₹1,000 | 10 | ₹1,20,000 | ₹1,12,339 | ₹2,32,339 | 94% |
| Y | ₹1,000 | 20 | ₹2,40,000 | ₹7,59,148 | ₹9,99,148 | 316% |
| Z | ₹1,000 | 30 | ₹3,60,000 | ₹31,69,914 | ₹35,29,914 | 881% |
Therefore, a Z mutual fund will give you higher returns with a growth rate of 881% as compared to X and Y. You will be able to accumulate a huge corpus of funds if you remain invested for a long period of time and let compounding work for you.
Lower Average Cost
This is the most important advantage of SIP, where your NAV of a selected mutual fund will average down with every installment you pay in the long run. NAV (Net Asset Value) is the value of purchasing a single unit of a mutual fund, and the NAV changes every day because the securities in which they invest will also change on a real-time basis. Every fund house or AMC will announce their mutual fund’s NAV at the closing time of the trading day.
To easily understand this one, let’s take an example. Suppose you are investing in any mutual fund that has a NAV of ₹50 today and has a SIP of ₹500 which gets automatically deducted from your bank account on the 1st of every month. In the first installment, you will receive 10 units. If the NAV increases to ₹60 next month, then you will receive 8.33 units. If the NAV falls to ₹40 in the third month, then you will receive 12.5 units. The average cost of buying 30.83 units will be ₹48.65.
In simple words, you will get the benefits of rupee cost averaging over the investment period, which is in contrast to the lump sum method where you can get the units only on the basis of the current NAV.
No Need To Analyze The Market
With SIP, you can begin making contributions at any time, and you’ll benefit from rupee cost averaging, which will reduce the overall cost over time. Therefore, there is no need to analyze the market and the NAV performance as you might do in a one-time investment and wait for the NAV to fall.
Varying Amount
With SIP, you have the option of choosing varying installment amounts as well as the flexibility of pausing or changing the installment at any time. You can also withdraw your money or redeem the units of a mutual fund without paying any extra cost.
Provides Ease
The top-up SIPs allow you to increase every installment amount by some percentage to beat inflation and earn a higher wealth amount. You can invest in tax-saving schemes such as ELSS mutual funds through the SIP, thereby investing in small amounts and also saving on your tax liabilities.
Regular Investing
With SIP, you will be able to develop the habit of regular investing as the installment amount will be automatically debited from your bank account. With this continuous investment, you will be able to generate wealth in line with inflation over time, which will be useful for retirement or child education.
Open-Ended Schemes
SIPs are provided by open-ended mutual funds, which can be liquidated at any time with no additional fees. Therefore, these open-ended schemes will help you in times of emergency, and you can choose to invest at your convenience.
Professional Expertise
Mutual funds are actively managed by fund managers, and they always try to invest in securities that will maximize investors’ returns. Therefore, if you are a new investor or just starting your investment journey, you don’t need to have a high level of financial knowledge, thereby taking a low capital risk by investing through SIP.
How To Start SIP Investment?
1. Open A Demat Account
To open a demat account, you have to fill out the application form provided by an authorized stock broker such as Alice Blue, in which you have to provide your personal details, such as name, email ID, mobile number, etc. After that, you have to complete the KYC process by submitting documents such as an Aadhar card, a PAN card, a driving license, etc.
2. Choose From Different SIPs
After successfully opening an account, you have to go to the SIP section and select the right mutual fund based on the investment goals you have. You have to analyze how much risk a fund has, how many units you want, and the minimum amount you would like to invest.
The different types of SIPs are:
- Regular SIP: In this SIP, the fixed amount will keep on deducting every month from your bank account automatically, and you don’t have to manage or see the performance of a mutual fund.
- Top-up SIP: This is also known as step-up SIP, where you can automatically increase your installment amount by some percentage every time. It helps you earn more wealth in the future, like market-linked stocks.
- Perpetual SIP: You can choose a perpetual SIP, and you don’t have to worry about renewing the investment. It will continue to invest until you cancel the SIP.
- Flexible SIP: With this SIP, you have the flexibility to change the installment amount or pause it anytime as per your wish and on the basis of the NAV’s performance.
- Trigger SIP: In this type of SIP, you can select trigger levels such as a specific index level, a predetermined NAV of the units, etc. If the specified trigger level is met, the SIP will begin, or units will be automatically redeemed or switched to another fund.
- Multi SIP: In this SIP, you can invest in various mutual funds of one AMC with a single SIP. The total installment amount will be divided into a predetermined ratio, and the amount will be automatically invested in multiple mutual funds.
3. Fill in the Required Details and Invest
After selecting from the various types of SIPs, you have to fill in the required details such as period of investment, frequency of investment (which can be weekly, monthly, quarterly, or semi-annually), and installment amount. The installment amount will automatically be debited from your bank account connected to your demat account on the specified date every month, and the units of the selected mutual fund will get credited to your demat account.
After that, you will receive an acknowledgment from the AMC or fund house in which you have invested that will have information on how many units you will get based on the NAV at that time. You can modify the details, such as the trigger date, frequency, period, and investment amount, and you can also pause the installment anytime.
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SIP Benefits- Quick Summary
- The most important benefit of SIP is the accumulation of wealth where you can get benefits on earned returns as well.
- You can start investing in SIP with amounts starting as low as ₹500.
- SIP provides the benefit of lower average cost as the total cost of purchasing units of a mutual fund will average down.
- There is no need to analyze the market when starting to invest in SIP.
- You can start the SIP investment by opening a Demat account, selecting from different types of SIPs, and then making the payment.
SIP Benefits- Frequently Asked Questions
The benefits of SIP are regular investing, averaging out the cost of investments, and achieving long-term financial goals through the power of compounding.
SIP is better than FD because you can invest in small amounts as compared to a one-time investment in FD. The SIP offers more liquidity and the flexibility to change the installment amount, but SIPs do not guarantee the returns as the FD provides.
Stopping SIP means either pausing the installments or redeeming the units. Usually, there are no charges for stopping the installment amount.
Yes, SIP is good for beginners who don’t want to take on a lot of risks when they start. You will get the expertise of the fund manager and be able to diversify your portfolio.
The disadvantages of SIP are that they are not good when the NAV is increasing because you will get a lesser number of units with each installment. Also, it is not good for investors who don’t have a regular source of income.
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