​What is SIP?
A Systematic Investment Plan (SIP) is a methodical strategy for investing that entails dedicating a fixed, predetermined sum of money to the market at regular intervals, typically on a monthly basis. The SIP approach is preferred for investing in stocks and Mutual Funds as it enables individuals to engage in the market while effectively reducing risks.
How do SIPs work?
The two guiding concepts of SIPs are as follows
Rupee cost averaging: SIPs provide a means to navigate market volatility by removing the uncertainty associated with predicting market movements. Consistent investments ensure that the overall purchase cost is smoothed over time.
During market upswings, you obtain fewer units, and during downturns, you receive more units. This reduces your risk exposure and guarantees that you accumulate investments at a more favourable average cost per unit.
Compounding: Regularly saving a modest amount of money over extended periods can yield exponential returns due to the power of compounding. The following examples illustrate this effect:
Individual 'A' commences investing for their 60th birthday at the age of 40. Assuming a 7% return and a monthly investment of Rs. 1000, their total portfolio after 20 years would amount to Rs. 5,28,000.
On the other hand, individual 'B' initiates investments for their 60th birthday at the age of 20. With the same 7% returns and a monthly investment of Rs. 1000, their total portfolio after 40 years reaches an impressive Rs. 26,56,436—nearly five times the amount accumulated by 'A'.
Consistent investments over extended periods result in more significant returns and profits.
Advantages of investing in SIP
Investing in SIPs provides various advantages:
Financial Discipline
The regularity of SIPs encourages financial discipline, fostering consistent savings and enabling the construction of a financial reserve without compromising one's lifestyle.
Convenience
SIPs present a convenient and hassle-free investment method. With a one-time set of instructions, investors can effortlessly initiate and manage their SIPs online, ensuring automatic accumulation over time with minimal effort.
Flexibility
​SIPs offer enhanced flexibility in investment. Investors can easily adjust the investment amount, whether increasing or decreasing, at any given time, adapting to changing financial situations.
Lower Risk
In contrast to lump-sum investments that may expose investors to significant capital risk, SIPs distribute investments across intervals. This not only mitigates capital risk but also helps navigate market volatility more effectively, contributing to a more stable investment journey.