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How To Invest In Sips
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In recent times Systematic Investment Plans or SIPs, as they are popularly known, have become a favourite among retail investors like you and me. For beginners who are wondering what SIP investment is, let me begin with the basics first.
SIPs are a regular and disciplined way of investing in mutual funds. You can start an SIP with as low as Rs.500 per month/quarter in a scheme. You can start an SIP either through your financial advisor or directly online. Further, you can invest regularly via SIPs in one or multiple schemes.
To start an SIP or Systematic Investment Plan, you need to be KYC/CKYC (Know Your Customer/Central KYC) compliant with any mutual fund house.
What are the benefits of SIPs?
Systematic Investment Plans offer several advantages and here is a list of positives that you can’t afford to ignore.
They are cheaper on the wallet as one can start a SIP with as low as Rs.500 per month/quarter.
They inculcate the habit of regular and disciplined investing.
They have the potential to create wealth over the long run.
Investing through a SIP makes market timing irrelevant by ensuring that one invests at all points of times (highs and lows) in the market thus averaging out the per unit cost. This is also called rupee cost averaging.
Investing in SIPs provides the benefits of compounding over longer periods of time. Now let’s look at some the distinguishing benefits of SIPs in greater detail.
As you know, all mutual funds have an element of risk attached to them as they invest in market related instruments. However, when you invest through SIPs in Mutual Funds, you can beat market volatility effectively through rupee cost averaging. This means you buy more units when NAV is low and lesser units when NAV is high. Over the long run, if the market has gained, the average cost of units tends to be lower than the prevailing NAV. When you invest regularly in Mutual Funds (MFs) through SIPs, you can beat market volatility effectively through rupee cost averaging. For example, if you invest Rs.1000 per month, you get 100 units if the NAV is Rs.10 and 200 units if the NAV drops to Rs.5. Over longer periods of time, the average price per unit will fall if markets move in both directions thus helping to lower volatility of returns as well.
One can create wealth by investing in SIPs in small amounts for longer periods of time and benefit from the power of compounding. What this means is that the return you make in the first month gets reinvested into your principal (monthly SIP amount) in the second month and this continues over many years thus enhancing the value of your investments. The longer you remain invested in SIPs the more you can benefit. Hence investing in the markets through SIPs in MFs over the long term can help you accumulate wealth.
Let’s look at a simple example to illustrate this. Suppose you invested Rs.1000 per month in an equity fund at 12% compounding rate per annum for 20 years, the final amount you would get is Rs.10 lakh on a principal of only Rs.2.40 lakh (Rs.1000 X 240months). The same SIP if extended for another 5 years to a 25-year time frame gives a final amount of Rs.19 lakh indicating the power of compounding over longer periods. The principal invested over a 25 years period is only Rs.3 lakh.
For SIPs in equity funds, it is important to have an investment of horizon of more than 5 years owing to the volatile nature of equities predominantly in the short term. SIPs in fixed income or debt funds may be considered if the investment horizon is less than 5 years and risk appetite is low. SIP tenure also depends upon when you want to achieve your goal.
There is no specific time to start a SIP. The earlier the better. SIPs make market timing irrelevant. Regularity and consistency is the most important aspect of investing in an SIP. If you want to learn more about SIPs don’t forget to visit this site which is like the dictionary of Mutual Funds, Mutual Funds Sahi Hai.
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