SIP – Systematic Investment Plan and it works

What is SIP and how it works

SIP (Systematic Investment Plan) is s systematic way of investment on a monthly basis in a smaller amount for a long duration. It is similar to a recurring deposit a/c of a bank. Where you deposit a small amount every month for a certain duration and get a sum of the sizable amount at the end of the maturity period. The amount you deposit in S/p in invested into equity market through a mutual fund company by pooling the funds of a large number of S/p investors.

How it works and grow

Your every investment is converted in proportional units which are credited into your account with the mutual fund. Company. The profits earned by the mutual fund company through the investment of such pooled funds of investors are divided/converted into small units propositional to your period investments. The net asset value (NAV) is declared by the mutual fund company on a periodic basis. You have an option to redeem the units of your account into real money either at the maturity or before it as per the rules prescribed by the mutual fund company. The value of real money at the time of the exit will vary according to the NAV at the time of exit. Thus SIP allows you to invest in a mutual fund by making monthly or grandly investments instead of one-time investment in the money market. For example, in SIP you can 10 periodic investment of 500/- in place of investing of Rs. 5000/- in Mutual Fund.

SIP thus buys mutual funds witting the reach of an average person, as the investment is made on a very small scale. Though investment of small amount may negligible at initial stages and may not appeal too much, it enables the investor to develop a habit of saving. If these habits continuous over the years, it will grow to give handsome returns.

For example, a monthly SIP of Rs 1000/- at the rate of 9% would grow to Rs. 6.69 lakh in 10years. Even for cash-rich investors S/p reduces the chance of investing at the wrong time and worries of wrong investment decision. The real benefits of an S/p can be realized or seen by investing lower levels.

The main benefits of investment in S/p can be summarized as under.

  1. Discipline
    The ground rule to build your wealth is to focus on long term financial goods, invest regularly and maintaining disciplined investment Pattern. Your disposable income would not be affected by parting smaller amounts every month as compared to invest a heavy amount one time.
  2. Power of compounding

According to financial experts, one must start early savings in life to get the real benefit of compounding. For example, person A started investing in Rs. 10,000 per year at the age of 35 and a person B started top invest the same amount at the age of 30. When both attain the age of 60 years. Respectively, A will build a corpus fund of Rs. 7.89 lac at the rate of 8% compounding whereas B will have Rs. 12.23 lacs. So the difference of Rs. 50,000 due to late starting of saving would result in a difference of Rs. 4 lacs to end corpus fund. The longer this period of compounding, the higher is the return.

  1. Rupee Cost Averaging  

This happens when you invest in equities. When you invest the same amount in equity fund at regular intervals over time, you can buy more units when the price is lower, reducing the average cost per share over time. This method is called “rupee cost averaging”.

This method protects the investors from market ups and downs while using the sensible and long seem investment planning. Therefore it reduces the risks of an investment in a volatile market. In S/p your average cost of investing comes down since you go through both up & down trends of the market.

  1. Convenience

The investment method of S/p is very convenient. Only you have to sign a mandate to the mutual fund co. giving your bank account details. The accent balance which should be sufficient to meet the S/p amount. Further, you will also get regular statements from the mutual fund company giving details of uniting and their net asset value (NAV).

  1. Other advantages

There was no entry or exit load on S/p investments capital gains, where ever applicable, are taxed on first in, first ant basis.

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