This is a simple strategy for accumulating wealth over a period of time by investing regularly at a fixed interval of time in mutual fund schemes. This is similar to the concept of recurring deposits, but since this investment is linked to equity, it carries relatively higher risk and higher return compared to recurring deposits.
A Systematic Investment Plan (SIP) is a method of investing a fixed amount regularly in mutual fund schemes. An investor commits to invest a specific amount at regular intervals over a continuous period. This strategy ensures that more units are purchased when prices are low and fewer units are purchased when prices are high.
SIP works on the principle of rupee cost averaging, allowing investors to automatically participate in market fluctuations while reducing the impact of volatility.
To avail the benefit of the power of compounding, one has to start early and invest regularly. Delayed investments may result in a higher financial burden to achieve the same financial goals. Investing early allows you to invest a smaller amount compared to investing later to accumulate the same planned corpus.
Rupee-cost averaging means averaging the cost price of investments. SIP helps achieve this by investing a fixed amount regularly at different Net Asset Values (NAVs).
SIP performs well in volatile markets. When markets fall, investors get more units, and when markets rise, fewer units are purchased. Over time, this helps average out the purchase cost.
Example:
• Investment 1: ₹1,000 at NAV ₹10 → 100 units
• Investment 2: ₹1,000 at NAV ₹12 → 83.33 units
• Investment 3: ₹1,000 at NAV ₹9 → 111.11 units
Total Investment = ₹3,000
Total Units = 294.44
Average Cost = ₹10.19 per unit
SIP is easy to start and manage. Investors can invest via post-dated cheques or ECS instructions. It is advisable to start investing early with a small amount and gradually increase contributions over time.
Waiting for the “right time” to invest can result in missed opportunities. SIP is a smart and disciplined way to achieve long-term financial goals such as child education, marriage, and retirement.
One can benefit from SIP only by selecting the right mutual fund schemes and remaining consistent without deviations.