Top 5 Advantages Of SIP OLD

As per the famous saying the basic need of an individual is Roti (Food), Kapda (Clothing) aur Makaan (Shelter) but we can extend it further to SIP (Systematic Investment Planning).

Before discussing SIP, let us first understand/revisit what is mutual fund, in brief?

Mutual fund is a vehicle to mobilize money from the investors to invest in different markets and securities, in line with the investment objectives agreed upon, between the mutual fund and the investors. In other words, through investment in a mutual fund, a small investor can avail professional fund management services offered by an asset management company.

Mutual fund is a pool of money managed by experts by investing in stocks, bonds and other securities with the objective of improving their savings. These experts will create a diversified portfolio from these funds.

SIP and advantages of SIP

Systematic Investment Plan in Mutual Fund is commonly named as SIP and it is getting very popular in India. Systematic Investment Plan is such a beautiful tool, which; if used properly can help you achieve all your financial goals.

We all have various financial obligations. Some of them are daily needs, school fees, etc that involve the major outgo of your cash. Others like a trip with your family or buying a fancy gizmo entails a one-time payment for which money can be relatively easily collected. But for long-term goals like retirement or purchasing a home requires you to save and invest for many years. Yet irrespective of the amount involved and the time horizon, planning and investing money systematically and regularly enables you to sail through these obligations. A SIP could prove to be a simple and effective solution towards achieving these goals.

A SIP is a method of investing in mutual funds, by investing a fixed sum at a regular frequency, to buy units of a mutual fund schemes. It is quite similar to a recurring deposit of a bank or post office. For convenience, an investor could start a SIP with a low rate of Rs 500; however, this amount may differ from one fund house to another.

What is your equation to investments:
1) EARN-SPEND=SAVE
2) OR EARN-SAVE=SPEND

The first one is the wrong way of investing. You should be saving in a disciplined manner and SIP enables you to follow the second, which is the correct equation of investments.

Advantages of SIP

1) Light on the wallet: It is easier to build a long-term  innings with singles than hitting 4s and 6s everytime. It is convinient to save Rs.500 or Rs.1000 every month than trying to save a lac in one shot.  SIP does not hurt and it gives long term benefit as well.

2) Makes market timing irrelevant: If market lows give you the jitters and make you wish that you had never invested in  equity markets, then SIPs can help you blunt that depression. Most retail investors are not experts on stocks and are even more out-of-sorts with stock market oscillations. But that does not necessarily make stocks a loss-making investment proposition. Studies have repeatedly highlighted the ability of stocks to outperform other asset classes (debt, gold, property) over the long-term (at least 5 years) as also to effectively counter inflation. So if stocks are such a great thing, why are so many investors complaining? Its because they either got the stock wrong or the timing wrong. Both these problems can be solved through an SIP in a mutual fund with a steady track record.  

3) Helps you build for the future: Most of us have needs that involve significant amount of money, like child's education, daughter’s marriage, buying a house or a car. If you had to save for these milestones overnight or even a couple of years in advance, you are unlikely to meet your objective (wedding, education, house, etc). But if you start saving a small amount every month/quarter through SIPs that is treated as sacred and that is set aside for some purpose, you have a far better chance of making the down payment on your house or getting your daughter married without drawing on your PF (provident fund).

4) Compounds returns: The early bird gets the worm is not just a part of the jungle folklore. Even the ‘early’ investor gets a lion’s share of the investment booty vis-à-vis the investor who comes in later. This is mainly due to a thumb rule of finance called ‘compounding’. According to a study by Principal Mutual Fund if Investor Early and Investor Late begin investing Rs 1,000 monthly in a balanced fund (50:50 – equity:debt) at 25 years and 30 years of age respectively, Investor Early will build a corpus of Rs 8 m (Rs 80 lakhs) at 60 years, which is twice the corpus of Rs 4 m that Investor Late will accumulate. A gap of 5 years results in a doubling of the investment corpus! That is why SIPs should become an investment habit. SIPs run over a period of time (decided by you) and help you avail of compounding.

5) Lowers the average cost: SIPs work better as opposed to one-time investment. This is because of rupee-cost averaging. Under rupee-cost averaging an investor typically buys more of a mutual fund unit when prices are low. On the other hand, he will buy fewer mutual fund units when prices are high. This is a good discipline since it forces the investor to commit cash at market lows, when other investors around him are wary and exiting the market. Investors may even be pleased when prices fall because the fixed rupee investment would now fetch more units.