Full Form of SIP
SIP stands for Systematic Investment Plan. It is a simple and smart way of investing a fixed amount in a mutual fund scheme at regular intervals like weekly, monthly or quarterly as per your convenience. It is similar to a recurring deposit in banks or post offices where you regularly save a fixed amount for a period of time.
Purpose of the SIP
SIP is a disciplined method of investing, and it is best suited for those who cannot invest a lump sum or huge amounts. One can start a SIP even with Rs 500, Rs 1000 or Rs 2000 per month etc. So, it is a form of regular savings where you invest a fixed amount at regular intervals. SIPs should always be tied to your financial goals. So, invest regularly and achieve big goals with small amounts every month.
Why a Systematic Investment Plan (SIP)?
The main objective behind a SIP is to invest a fixed amount weekly, monthly or quarterly for a specified period of time. Thus, allowing you to be disciplined in your savings. Since you are investing on a regular basis at regular intervals, your overall investment price is averaged, and you are less likely to be adversely affected by the fluctuations of the market. Also, you do not need to commit a lump sum in one go.
Advantages of SIP
- Discipline- It helps to build financial discipline. A predetermined amount of money is auto-debited from your bank account at regular intervals and invested in a specific mutual fund scheme. Hence, it instils the habit of savings, and you become more disciplined in your savings.
- Flexibility– SIP gives you the flexibility to start with smaller amounts and increase gradually year over year if you have more money. You can take out your money in partial or full whenever you need, and you can stop the SIP anytime.
- Higher Returns– Compared to traditional investing methods like FDs, RDs etc., SIP provides you with an opportunity to generate higher returns. But for this, one must choose a good scheme and a good fund manager.
- Affordability. It is affordable for all types of investors. You can start a SIP with an amount as low as Rs 500 and invest in any mutual fund scheme at regular intervals say daily, weekly, monthly, quarterly etc.
- Rupee cost averaging– As the market is volatile and has its ups and downs, timing the market is challenging for most of us. But when you invest in SIP, you don’t need to worry where the market is going because your regular investment in high and low market conditions averages out to a good return in the long run. As a regular investor, you buy more units when the price is low and lesser when the price is high, thus averaging your purchase price.
- Power of Compounding– As little drops of water make the mighty ocean small or big; similarly, SIP, which continues for a longer time helps you to get the benefit of the power of compounding. Here, small amounts invested keep adding up to create a large amount of money. You will receive interest not only on your initial investments but also on interest, dividends and capital gains that accumulate over time. Your investments can grow faster and faster as the years go by, and you may achieve your financial goals earlier. But for this, one must start investing early and remain invested for the long term.
Disadvantages of SIP
- It requires a long-term commitment and disciplined approach to achieve your financial goals.
- You have to pay an annual fee to the mutual fund house for managing your money. This annual fee is known as expense ratio, which is a small part of your total investment value.
Also Read: Full Form of SIP