A mutual fund’s systematic investment plan (SIP) is a type of investment route that allows investors to invest a fixed amount in a mutual fund scheme at regular intervals, such as once a month or once every three months, rather than investing all their money at once. This is in contrast to a lump-sum investment. The payment amount, analogous to a recurring deposit, might be as little as Rs. 500 monthly. It is handy since you may give your bank instructions to automatically deduct the cash from your account each month.
But what are the advantages of SIP investments, and how do you choose an investment option that works for you? Let us find out.
Advantages of SIP
The magic of compounding: The most critical factor in why the impact of returns is always long-term is compounding. You will get returns on your investments on a monthly or quarterly basis. This money is added to the next investment, which serves as an investment, and it is invested. Because of this, the corpus grows monthly, and the investment amount grows due to compound interest.
Greater returns: The fact that returns on SIPs are often higher than those on standard investing alternatives is one of the most essential advantages of these plans. This is possible mainly due to the compounding as mentioned above effect.
It helps you start slowly.: Even if you have a modest income, you may start investing in mutual funds using a systematic investment plan (SIP). You need just Rs. 500 to get started with SIPs. This is a cost-effective way to invest toward your goals when you don’t have a large sum of money to invest all at once or have a limited amount of earnings. On top of that, it lets you add more money to your SIP whenever it’s most convenient for you. Therefore, if there is an increase in your income or you manage to save more, you have the option of increasing your SIP payment by selecting a “top-up” SIP, which is also known as a “step-up” SIP.
Rupee-cost averaging: When making equity mutual fund investment through a SIP, you invest a predetermined amount regularly across several market levels without needing to time the market. So, you don’t have to worry about market cycles or when to make your investments. In addition, it allows you to purchase more units when the market falls and lesser units when it increases.
Using SIPs, you may reduce the effect of short-term market changes on your investments by averaging out the purchase price of stock fund units over time. You gain from rupee cost averaging during periods of significant market volatility and may earn more enormous profits when the market rebounds.
How to choose the right SIP mutual fund?
- Good funds, on average, have generated stellar returns in the past. Though inferior funds tend to underperform in volatile markets, vital funds tend to gain in average markets. If nothing else, they end up doing better than their competitors in the long term.
- The mutual funds compatibility with your long-term financial strategy is a critical factor to consider. The fund in question must be optimal for your needs in terms of returns, risk, liquidity, and tax efficiency.
- If the fund’s top positions, such as CEO, CIO, fund managers, etc., tend to change hands often, you should look elsewhere. That bodes poorly for long-term investment results and policy continuity.
- Maintain consistent vigilance in your financial situation. Contributing to the fund is just the beginning of your responsibilities. You shouldn’t subscribe to the “Invest and forget” school of thought.
SIP investments often work best when invested according to your investment horizon. Therefore, ensure you consider the above pointers to be able to find a fund that works the best for you.