How to Invest in SIP

SIPs have quite a few interesting features that make them beneficial, and that’s why they make an attractive investment option for both novice and seasoned investors. Let’s take a close look at what these benefits are.

• Rupee Cost Averaging : You’re investing a fixed amount at regular intervals, regardless of the market conditions. Here’s why it can be beneficial.
• Market Fluctuations: The stock market is known to be volatile as the prices change all the time. When you invest a fixed amount through SIP, you end up buying more units when prices are low and fewer units when prices are high. The effect of the market volatility gets averaged out because of this kind of purchasing.If you invest Rs 5,000 each month, and the NAV of a mutual fund is Rs 20 in January, Rs 25 in February, and Rs 15 in March, you will acquire 250 units in January, 200 units in February, and 333.33 units in March. When you look at it over time, this averaging results in a lower average cost per unit compared to a big investment made at a single point in time.
• Power of Compounding : Compounding is the process wherein your investment generates returns that further earn returns. SIPs make proper use of the power of compounding by:
• Regular Investments: You allow your returns to compound because of regular investing. Even the smallest of amounts can grow significantly if invested consistently.
• Long-Term Growth: The more time you can stay invested, the better the compounding effect is. It simply means to begin as early as possible and remain invested for a long period of time because that will maximise the potential of your investments to grow exponentially. Assume you invest Rs 5,000 every month for 20 years in a mutual fund earning an average annual return of 12%. Over 20 years, you would have invested Rs 12,00,000, but because of the compounding effect, your investment may grow to about Rs 50,00,000.
• Disciplined Investing : SIPs enable automated investing, hence keeping investors disciplined with their money.
• Automation: In the case of SIPs, a specific amount is automatically deducted from your bank account and invested in the mutual fund. You can ensure that you are regularly investing without having to remember on your own.
• Avoiding Market Timing: Timing the market is one of the most common mistakes investors commit. Most often, it leads to buying high and selling low. SIPs keep such risks at bay by enforcing a fixed investment schedule irrespective of the trend in the market.
• Behavioural Benefits: SIPs inculcate the habit of saving and investing. It brings about financial discipline and reduces impulsive decisions.
• Affordability : SIPs are available to all, irrespective of income.
• Low Entry Point: You can start a SIP with an investment amount that is just about anything, the lowest being Rs 500 per month. This way, everyone, no matter where they may come from, could easily start investing.
• Gradual Investment: You do not have to wait for a big lump sum for making an investment. SIPs enable you to begin investing right away with the money that you can afford.
• Flexibility : SIPs offer significant flexibility in meeting diverse financial requirements and goals.
• Adjustable Amounts: You can increase or reduce the SIP amount according to your financial position. Say you receive a salary hike. You can increase your SIP contributions to boost your savings.
• Pause or Stop Investments: If you face financial constraints, SIPs allow you to pause or stop the investments without any penalties. You can easily manage your finances without any stress.
• Multiple Plans: You can invest in multiple SIPs across different mutual funds. It diversifies your entire portfolio and balances the risk too.
• Diversification : When you invest in SIPs, it provides diversification. It also reduces the risk associated with investing in individual stocks.