Mutual funds not only offer a safer and indirect way to buy into stocks, they also offer a range of investment strategies to beat the market, if applied in a suitable way. One of these strategies is SIPs or Systematic Investment Plans (SIPs), where a fixed amount is invested at a pre-determined point of time. Ask any financial planner or an investment advisor the secret of creating wealth and he would most likely recommend SIP as one of the ways.
Here are the five important reasons why one should go for SIPs.
(1) Disciplined Investing: One of the great advantages of SIP is that it helps disciplined investing. Disciplined investing means you can cushion the pitfalls of stock market investment and still enjoy high returns on your investment. SIP is like climbing a high-rise building not in one go, but step by step. Under SIP, you can invest a fixed sum of money in a particular mutual fund scheme at regular intervals, generally monthly or quarterly.
(2) Rupee-cost averaging: Another great advantage of SIP is that it averages out your cost of investment and hence reduces your risk. Let’s understand it with an SIP of six months. In the first month, if you invest Rs 1,000 in a fund NAV of Rs 20, it means you have bought 50 units of the fund. Again, in the second month you invest Rs 1,000 but the NAV of the fund dips to Rs 18. This means you buy 55.5 units of the fund in the second month. In the third month, again you invest Rs 1000 while the NAV climbs to Rs 19. This means you buy 52.6 units. In the fourth month, again the NAV goes down to 16 and you get the opportunity to buy 62.5 units, more than the previous month. In the fifth month, the NAV further goes down to 15, but you bag a higher number of units i.e. 66.6. In the sixth month, the NAV goes up to 19, which means you pocket 52.6 units again. Thus, at the end of six months your total investment comes out to Rs 6,000 and you manage to accumulate 50+55.5+52.6+62.5+66.6+52.6 = 339.8 units. The total value of your investment after six months amounts to Rs 6456 (19*339.8). If you were to put in a lump sum of Rs 6,000 in the same fund, you would have owned only 315 units (6000/19) as against 339 units through SIP. This is the magic of rupee cost averaging that reduces risk and generates superior returns.
(3) Power of compounding: And not to forget the power of compounding that comes along with regular fixed investment over a period of time. SIP gives you the edge of compounding by reinvesting the money you earn from your investments to earn even more. The earlier you start, the longer your investment gets time to compound and add to your corpus.
(4) Start with small amount: Many fund houses allow SIP with as low amount as Rs 1000 a month. SIP is thus a very good investment option for small investors who cannot contribute a large sum for their life goals.
(5) No need to time markets: For investors wary of stock market vagaries, going the SIP way of investing through mutual funds relieves them of the pain of timing the market, i.e., the right time to enter and exit. The crux of SIP way of investing is that small investments, over a period of time, diversify our investment, benefit from market volatility and thus result in large wealth and help fulfil our dreams & aspirations.