SIP has become the most popular way of investing in mutual funds, especially in recent years. Furthermore, advancements in technology and digital space add up for SIPs. This investment vehicle allows investors to invest in the stock market via mutual funds even with a nominal amount of Rs. 100.
The first benefit of investing via SIP is qualitative. For this, you need to understand the meaning of SIP. SIP refers to Systematic Investment Plan. This investment vehicle allows investors to invest a particular sum irrespective of the market price of the underlying assets, on a particular date and time. Most SIPs are monthly; the investor has to invest in the SIP every month. Suppose you start a SIP of Rs. 2500 and select the date of SIP to be the 10th of every month. Now, if you automate your SIPs, on the 10th of every month, Rs. 2500 will be deducted from the bank account linked to the SIP and will get invested over the next few days after processing the application and allotment of shares.
The second crucial factor for investing via SIP is the rupee cost averaging. Since SIPs are not timed by the market and invested on a particular date, if the prices are high, you get fewer units of the fund, while during the low phase in the market, the units which get allotted are high. This is known as rupee cost averaging . It helps you get more units usually than buying with a lump sum investment in mutual funds.
SIP and compounding are like two sides of the same coin. Even with the small amount that you invest in the mutual funds through SIP, with the help of compounding, it can help you accumulate huge wealth over the long term.
If you invest in SIPs for a longer duration, you do not have to worry about market volatility. The short-term dips in the market will be waived out with time over the long term, providing generous returns.
Finally, diversification comes hand in hand with SIP investments. As mutual funds invest in multiple stocks, commodities, or other assets, when you invest using SIP, your investments get diversified to a great extent without having to invest a huge amount at a time in each segment.
SIPs are changing the way the mutual fund industry works. It is easy to operate, understand and invest in. With SIPs, you can invest a small amount and wait for them to grow into enormous wealth over time with the help of compounding and rupee cost averaging.
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