Let’s take a look at few interesting facts on SIP plans in India.
- Market timing becomes irrelevant
One of the biggest difficulties in equity investing is; when to invest or where to invest? While investing in a mutual fund solves the issue of where to invest, SIP plans help us to overcome the problem of when to invest.
SIP plans involve disciplined investing irrespective of the state of the market as SIP investors buy even when the markets are low. When the markets are bullish, it may not be prudent to commit lumpsum investment and go for a staggered investment, thus balancing your portfolio. This makes timing the market irrelevant.
- Reduces the average cost
In SIP plans, one starts investing a fixed amount regularly. Therefore, one ends up buying more units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee cost averaging.
If you are not well versed with the swings of the market, it would stay away from making ill-timed investments with a one-time investment. It would be better to avoid lumpsum investments when the markets are rising. Starting an SIP tends to average out the cost of your investment portfolio as you buy even when the markets are low, which is the best time to buy.
- Power of compounding
Compounding is the ability of your investment to generate earnings, which are then reinvested to generate their earnings. In simpler words, the returns you will earn from your invested amount will be re-invested, and thus increase your principal amount. Starting a Systematic Investment Plan (SIP) will help to grow your investment with the power of compounding as you invest a fixed amount every day/week/month etc. You can use a SIP plan calculator to find out how much to invest monthly and how would your investment compound over the years.
- Does not strain our day-to-day finances
SIP plans allow us to invest very small amounts (starting from Rs. 500/-), as against larger one-time investment, if we were to buy directly from the market. This makes investing easier on our wallets due to the flexibility in the ticket size. SIP plans, therefore, become one of the ideal investment options for a small-time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
If you wish to accumulate your savings prudently, you might opt for a larger SIP amount.
However, it is advisable to research before starting SIP plans for 1 year or a longer duration in a mutual fund. Do not select a fund merely on rankings and ratings. While investing, it would be advisable to have a long-term approach and select the fund whose investment objective matches your financial goals and needs. Do consult your financial advisor for assistance.
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.