Systematic investment plan offers periodical investment option, which is especially designed for those investors, who do not want to invest their money lump sum, in fact it’s for those who want to invest their money in mutual funds but in periodic intervals.
It works similar to the process of deposit money every month in a bank but difference is that of course it is an investment in mutual funds. This opportunity allows investors to buy shares on regular schedule. Mostly this is done through account deduction. Remember systematic investment plan is the plan which helps you to achieve your investment goals rather a tool which improves your returns.
The prime goal of this investment plan is to help investors to identify their investment objectives and help them out to achieve these goals by giving them systematic investment mechanism of equity related mutual funds. These mutual funds provides steady investment plan but all the value depends on the portfolio of the mutual fund. Many analysts think that systematic investment plan and monthly income plan is somewhat the same thing with different names.
The difference is systematic investments plan is managed by a group of investment professionals, who have expertise in risk assessment and reduction, portfolio management and diversification, minimize trading cost, flexibility of liquidity, and access to corporate information. Simply it is a most simple, time oriented formula crafted to help investors for accumulating money over longer course of time. It is considered to be a most effective strategy to invest money in volatile markets. It has the ability to handle the volatility of the market in disciplined way. It is the best technique to mitigate the risk of investor’spoolmoney.
This is the best way for individuals to earn returns on safe investment through systematic investment plans. This is the best way to get a start to your investment and enter into a mutual fund. It is a long term investment plan in which you can’t withdraw your money immediately, it takes at least two to three years, when you can withdraw your money. Despite all this, systematic investment plan is the safest option for investment in MFs.
Why to invest in (SIP) Systematic Investment Plan?
1. Discipline
The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern. A few hundreds set aside every month will not pinch your monthly disposable income too much. You will also find it easier to part with a few hundreds every month rather than investing a big lump sum in one go.
2. Power of compounding
Investment gurus always recommend that one must start investing early in life. One of the main reasons for doing that is the benefit of compounding. To explain with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, person A had built a corpus of Rs 12.23 lakh while person B’s corpus was Rs 7.89 lakh. A rate of return of 8% compounded has been assumed. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end corpus. That difference is due to the effect of compounding. The longer the compounding period, the better for you.
Now instead of investing Rs 10,000 each year, suppose person A invested Rs 50,000 after every 5 years, starting at the age of 35. The total amount invested, thus remains the same, which is Rs 3 lakh. However, when he is 60, his corpus will be Rs 10.43 lakh. Again, he loses the advantage of compounding in the early years.
3. Rupee cost averaging
This is especially true for investments in equities. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share or per unit over time. This strategy is called 'rupee cost averaging'. With a sensible and long-term investment approach, rupee cost averaging can smooth out the market's ups and downs and reduce the risks of investing in volatile markets.
We can sum it up saying that, "In developing economies like India, where securities markets (equities and fixed income instruments) can be volatile and it is rarely possible to time the markets and predict the future. We can seldom accurately predict when a particular stock will move up or where the interest rates are headed."
" Also Systematic Investment Plan makes the volatility of the securities markets work in your favor. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always be less than the average sale price per unit, irrespective of the market rising, falling, or fluctuating. This concept is called Rupee Cost Averaging (RCA)."
Prepared By :
RISHMA SHETTY
(Business Development)
(Business Development)
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