As of August 2023, the number of mutual fund SIP accounts in India reached a staggering 6.97 crore, with a total collection of ₹15,814 crores during the month of September, 2023. This showcases that plenty of people really like SIPs, and millions keep using them to invest in Indian mutual fund schemes.
SIP, or Systematic Investment Plan, is like a financial magic trick for the youth. Imagine buying your dream car or saving for that dream concert ticket. With SIP, you can make your own money. So why wait?
Let us understand how SIPs can be your financial accomplice on the pathway to financial freedom!
What is SIP anyway?
A Systematic Investment Plan is a SIP mutual fund investment strategy. Rather than a one-time investment, investors commit to contributing a predetermined sum of money at monthly or quarterly intervals.
They take advantage of the benefits of rupee cost averaging and the potential for compounding over long periods. This method is effective for people who wish to save money, plan for retirement, and or cover their quality education.
How do SIPs work?
You invest a fixed amount consistently instead of a lump sum amount, often monthly or quarterly. When markets are low, you get more units and vice versa. This helps you to average your cost and reduces the effect of the market’s ups and downs.
Say you plan to initiate a monthly SIP of ₹ 2,000 in a mutual fund scheme with an initial NAV of ₹ 100 per unit. When the SIP instalment is deducted from your account, you will acquire 20 units (₹ 2,000 / ₹ 100) of the fund. If the NAV increases to ₹ 110 per unit when you make your next SIP payment, you will receive 18 units (₹ 2,000 / ₹ 110).
This process repeats on a fixed date for each month until you decide to terminate your SIP.
SIP is an easy and efficient way to put money aside for the future because it allows you to accumulate wealth gradually and maximise from compounding.
How to invest in SIP? While investing through SIP in mutual funds, you will need to make four key decisions.
- Choose the specific mutual fund you would want to invest in.
- Next, choose your investment amount and payment schedule (weekly, monthly, or quarterly are all options).
- Later specification of the SIP amount to be deducted on the particular date from your bank account needs to be mentioned.
- Once the SIP amount is debited from the account on the selected date, the fund house processes and provides you with the units based on the current NAV (Net Asset Value).
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The units of SIP given to you are determined by the scheme’s NAV on that particular date. You get a lesser number of units if the scheme has a rising NAV and vice versa.
Benefits of SIP
Rupee-cost averaging: SIP mutual fund involves investing an amount that is fixed at regular intervals, making sure a large number of units are purchased when the prices are low and very few are bought when high.
Financial discipline: SIP fosters a culture of disciplined and regular investing, encouraging individuals to develop consistent savings habits.
Expert fund management: The SIP investment plan is overseen by fund managers who are experienced and make decisions through in-depth research and analysis.
Compounding potential: SIPs use the magic of compounding to reinvest returns, allowing investments to rise significantly over time. Compounding helps earn interest on the principal amount along with the accumulated interest.
Starting early capitalises on time and the compounding effect, even with modest initial investments.
Imagine two friends, each embarking on their SIP journey but with a significant gap. Say Karan initiates his SIP at the age 20, while the other friend, Arjun, decides to begin at 30.
Both have their sights set on the distant horizon, aiming to build a substantial corpus by the time they reach 60.
Let’s take an example of ₹2000 for the years to be invested and see what the corpus will be. We can use Stockgro’s calculator – to help understand the magic of starting early.
The corpus amount of investing for 40 years shows a drastic difference as compared to 30 years.
Types of SIP
Different types of SIPs for various preferences in investments and ultimate goals:
- Regular SIP: The standard type of SIP where investors contribute a fixed amount at regular intervals, fostering disciplined investing.
- Top-up SIP: Allows investors to boost their SIP investments periodically, accommodating income growth and capitalising on increased earning potential.
- Flexible SIP: Ideal for those with fluctuating financial situations, as it permits investors to adjust SIP amounts as needed, ensuring financial stability.
- Trigger SIP: Tailored for strategic investing, where investments are triggered based on specific market conditions, optimising returns while mitigating risks.
- Perpetual SIP: Offers a set-and-forget approach, allowing SIPs to continue indefinitely, making it a hands-free, long-term investment option.
- Multi SIP: Enables diversification by letting investors allocate funds across multiple SIPs, spreading risk and enhancing portfolio balance.
- SIP with insurance: Combines the advantages of SIP investments with insurance coverage, protecting investors’ and their loved ones’ financial security in the event of unforeseen events.
SIPs are accessible means of wealth creation. Whether you choose a Regular SIP, embrace the flexibility of a Flexible SIP, or explore the potential of Trigger SIPs, the power of systematic investing cannot be underestimated.
You can put yourself on a path to financial security and prosperity by selecting the SIP type that corresponds with your financial goals and making adjustments as necessary.
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