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A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help you save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund. The minimum amount to be invested can be as small as 100 and the frequency of investment is usually monthly or quarterly. Small savings (Rs 1000 /month) through SIP may not seem so motivating for beginners but I propose all newbies must start their investment and buy mutual funds SIP. Its first advantage is that it allows the investors to get into the habit of saving when they buy mutual funds SIP. A small savings of just Rs 1000 a month at a rate 9% rate of return can fetch you Rs 6.65 lakhs in 10 years. The best thing is that you will not even notice that Rs 1000 is getting invested each month and at the end of 10 years you will have Rs 6.65 lakhs at your disposal. If you would have not invested in SIP, you would have spent it any how. Its much better that one should buy mutual funds SIP. Mutual Fund companies directly debit your account the amount of money you approve (say Rs 1000) each month without disturbing you. SIP is convenient and that is the reason why even cash-rich choose to buy mutual funds SIP. SIP can make make their savings grow faster ( Calculations are on assumption basis)
A SIP is a disciplined investment plan and helps reduce susceptibility to market fluctuations. It is a powerful tool that helps you preserve capital and also translates into substantial wealth creation in the long run. The tenure may be different under different schemes. Usually, you should stay invested for a long enough period, so as to maximise your returns. In the case of a SIP, you will be investing irrespective of the market conditions. This ensures that cost averaging comes into play and allows you to benefit from volatility. Of late, the stock markets have been volatile. It is very difficult for individual investors to decide on when to invest - time their investments . When you buy more units at a lower price (when the market falls) and lesser number of units at a higher price (when the market goes up), you average out your investment costs. Suppose a monthly SIP is for Rs 10,000 and the fund's net asset value (NAV) is Rs 10. This will result in 1,000 units being credited to you. However, next month, on account of volatile market conditions , if the fund's NAV falls to Rs 5, you will get 2,000 units. This will lower your average purchase cost. A SIP helps you buy more when the stock market is falling and less when it is rising.
A SIP is an excellent tool for investors to build wealth. There is no need for a one-time lump sum investment. A regular investment pattern helps build discipline in investors. You can go for a SIP according to your goal - marriage of children, their education needs or your retirement corpus. The 'rupee cost averaging' makes the market fluctuations work for you, and reduces the risk of investing all your money just before a market downturn. Rupee cost averaging works best with investments that tend to fluctuate in price regularly. So a SIP can be most effective when used in buying equity-based funds. The NAVs of these funds can vary widely. Through rupee cost averaging a SIP can make this volatility work for your benefit. However, rupee cost averaging may not work well if the market keeps on an uptrend. SIPs can be used by investors of all ages. You should never discontinue a SIP in weak market conditions or when the markets fall sharply, as this will defeat the very purpose of investing in a SIP. An investor who does not have a large amount to invest in one go and one who does not want to take much risk should go for a SIP. This will enable him to invest periodically to suit his budget. A SIP offers flexibility and helps you identify funds that suit your risk-returns profile. In case of a SIP, the asset allocation keeps pace with your changing risk-returns profile. Besides, investing this way offers liquidity whenever required.