The wealth creation process is a long and tedious one. It starts with small amounts invested in a diverse range of instruments until you can afford a lump sum investment. You can keep away a small number of funds in shares, mutual funds, fixed deposits, and gradually build a corpus. Besides, you need to exercise discipline with your investments. One of the best ways through which you can build a disciplined approach towards investments in SIP. Let us understand what it is and how to invest in the same.
Meaning and definition:
Also called a systematic investment plan, it is an option available for mutual fund investors. Fund houses provide this option to the investors who cannot afford to make lump sum investments in mutual funds. Through SIP, you can invest a small, fixed sum in one or more mutual funds. You can do investment weekly, fortnightly, monthly, quarterly, or half-yearly instalments.
Let us understand SIP investment through an example. Say you have chosen to invest in XYZ mutual fund. You decide to invest INR 3,000 on the 10th of every month. The price per unit is INR 25. At the said price, you would receive 120 units of the fund on the 10th of the month. Nw, if the fund begins to perform well and the price per unit increases to INR 30, you get credited with fewer units, i.e. 100 units on the next instalment. However, if the unit price falls to INR 20, then the number of shares allotted would be 150. As such, the investment amount remains the same, but the units allotted increases or decreases accordingly.
Process of investing in SIP:
Every investor hopes to select the best SIP mutual fund to invest in. However, there is a standard investment process that all investors must follow. There are many benefits of opting for SIPs:
Financial discipline
One of the most crucial factors to make sure you can meet your long-term investments is financial discipline. When you invest in a systematic plan, the fixed amount gets debited from your bank account on a specific date for a predetermined amount. Your investment is not dependent on your ability and willingness. Additionally, when there is a market correction, you may get tempted to discontinue the investment. However, SIPs ensure the investment does not stop even if the market falls, which is essential to meet the long-term goals.
Compounding effect
When you remain invested for a longer period, you can accumulate higher corpus because of the power of compounding. This means your mutual fund returns get reinvested in the same scheme for accumulating more units. Therefore, your dividends can earn additional income through the compounding effect. For maximising the power of compounding, you should start investing early so that they can grow for years.
Rupee cost averaging
The best part about SIP is the rupee cost averaging. It means that when the net asset value is high, your instalment can acquire lesser units. Similarly, when the NAV is low, the instalment accumulates more units. Therefore, the average cost f your total holdings reduce as the number of instalments increases. As a result, you can earn higher profits on your principal amount at the time of exit, giving you an increased SIP return.