Every individual tries to find ways and means of saving for the future. For a quality life and having a financially independent life post retirement, this is very important. If you are wondering as to which may be one of the best ways of investing for the future, then you might give Systematic Investment Plan (SIP) a thought.What is SIP?SIP is a disciplined, simple and
time-honoured investment strategy that seeks to build your wealth over a long period of time.
It is a method of investing a fixed sum for a continuous period in a Mutual Fund at regular intervals. You may invest weekly, monthly, quarterly and the like based on the options available for a scheme in the offer document. This is a systematic and planned way of saving and aiming to build wealth for your future.How SIP works?
When you invest in the schemes of mutual fund through SIP, a certain amount of money is auto-debited from your bank account provided standing instructions are given to bank. This amount is an investment in a particular Mutual Fund investment scheme. A certain number of units are given to you based on the Net Asset Value prevalent on the date of purchases. You can even submit cheques along with the filled-up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to your account and will send the confirmation i.e. the account statement for the same. The benefit that you get is rupee cost averaging and compounding.Why must one opt for SIP?
The importance of sincerity in SIP investments
- The earlier you start investing in SIP the better will be the potential growth.
- Through SIP, when you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower and fewer units when the prices are higher. So, your average cost per share (or per unit) is reduced over time. Thus, SIP seeks to provide reasonable returns over a period of time.
- One of features of SIP is that it doesn’t demand huge one-time investments, rather a little every month is more than enough.
- You even get flexibility. You can stop investing whenever you want or increase or decrease the investment amount as per your will.
It is important that you are sincere and make regular investments in SIP as this is less risky as compared to investing lump sum money in one go. When you invest a big amount in one go and if the market plunges, then you can incur huge losses. But when you invest regularly, then the cost of investments gets averaged. As a result, the chances of suffering from a big loss are possibly reduced.Remain focussed on SIP investments
So, if you wish to earn a substantial amount of money by the time you retire, then systematic investment in Mutual Funds from a young age is probably a feasible option. For those who are worried about the risk factor one may try and invest in different types of Mutual Funds through SIP. This may help in bringing down the risk. Instead of opting for pure equity funds, you may select less volatile schemes which have a low risk factor. You may try and focus on the schemes that help you the equity benefit but will also imbibe disciplined financial approach of investment. Thus, SIP in a Mutual Fund is one of the ways of earning potential return in the long run.
What more? You get a number of different options in SIP like short term bonds which may reduce the risk and may help you get reasonable returns. Thus, overall, SIP is truly small on savings and big on avenues for investment. For that, all you have to develop is a good habit of regular savings.Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.