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Here’s all you have to know about systematic investment plans

Author: Team Finapolis/Sunday, January 21, 2018/Categories: Mutual Funds

Here’s all you have to know about systematic investment plans

A systematic investment plan is a method of investing a fixed sum of money at regular intervals for a specific time-period in a mutual funds scheme. It allows the investor to buy units on a given date each month, thus helping you accumulate the required corpus for reaching the goal. The monthly investment scheme is far easier to maintain in the long run than investing a lump-sum amount each year.

An SIP is an ideal investment avenue for those looking at planned investments. It not only helps you achieve your financial goal but also develop the habit of saving and wealth building for the future.

An SIP can be run for an indefinite amount of time. It is recommended to run it for a minimum of six months to start reaping substantial benefits. There is an option to go for the perpetual option. Under that, money will get deducted periodically until the investor gives instructions to close the account.   

How does it work?

Once you sign up for a systematic investment plan, the amount decided is auto-debited from your account each month. It then invests the money in a mutual fund scheme. A certain number of units are allocated per person based on the on-going market rate or net asset value of the day. More the number of investments you do, additional units are purchased at the current market rate. All the units are deposited in your account. The money is earned from these investments when the benefits are got through rupee-cost averaging and power of compounding.

Power of Compounding

Compounding works on one simple rule, the earlier you start investing, the more time your money has to grow.

An example of the power of compounding: If one invests Rs 10,000 a month from the age of 40 for a period of 10 years in an SIP at 7% interest, it’s worth would be Rs 52 lakhs at the age of 60. If the same investment was started at the age of 30 years, the investment would more than double and stand at Rs 1.2 crore at the age of 60. 

Thus, starting early is key to getting optimum results.

Rupee-Cost Averaging

Many people are scared to invest due to the volatile nature of the markets and always skeptical of the best time to invest. Rupee-cost averaging saves the investor the trouble of finding the right time. As you are a regular investor, the invested money will fetch more units automatically when the price is low. Similarly, it will obtain lesser units when the price is high. Thus, it eliminates the risk factor while keeping your investment active. During the period when the market is volatile, rupee-cost averaging allows you to achieve a lower average cost per unit.

Given below is a chart for better understanding of the rupee-cost  averaging:

SIP month

SIP amount

Current Price

Monthly units

Total units

Total value

1

5,000

400

13

13

5,000

2

5,000

350

14

27

9,375

3

5,000

300

17

43

13,036

4

5,000

250

20

63

15,863

5

5,000

200

25

88

17,690

6

5,000

250

20

108

27,113

7

5,000

300

17

125

37,536

8

5,000

350

14

139

48,792

9

5,000

400

13

152

60,762

10

5,000

450

11

163

73,357

11

5,000

500

10

173

86,508

12

5,000

550

9

182

1,00,159

Total

5,000

550

182

1,00,159

 

Benefits of SIP

  • Long Term Gains: With the advantages offered by rupee-cost averaging and power of compounding, SIP is the ideal investment for those with long-term goals.
  • Flexible: SIP is one of the more flexible investment options out there. You can choose to discontinue the investment at any time, and even increase or decrease the amount invested each month. There is no compulsion to maintain it for a particular amount of time.
  • Convenience: Sip is extremely hassle-free. Once the bank is notified to deduct a certain amount each month, a standing instruction is issued to automatically carry it out unless stopped otherwise.
  • Disciplined Savings: SIP helps you maintain discipline in your monthly investments. You commit yourself to save regularly and as the deduction is automatic from your account, you don’t have to worry about missing a payment.

SIP can be pitted against the lump-sum investment mode in a mutual fund. One of the most popularly asked question of new investors is which one of preferred. As such, both are good investment options and can complement each other. While SIP is a disciplined format of investing a sum at regular intervals for a specific period of time, a lump-sum investment is a one-time affair. Lump-sum investments are done by those with a deeper knowledge of the market as it yields best results when done at a time when valuations of shares are low. SIP is for the common man who need not have in-depth market knowledge.

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rajyashree guha

Team Finapolis

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1 comments on article "Here's all you have to know about systematic investment plans"

Shiv Prasand

1/24/2018 3:51 AM

Hello There! Thank You For Sharing The Info. It's Really Useful & Enlightening. Will Revisit Continuously To Check Up For New Updates. Keep Up The Good Work

Website Link:

http://dhannuvavetar.com/

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