What is SIP investment and why you shoud choose it

Money is the source of material comfort. If you do not have money you are in big trouble but if you have money you are in bigger trouble. The way out of troubles of those who have-nots have been discussed here while in this post I tried to discuss those who are confused about where to put their spare money. Before getting into the details of SIP let’s understand the ways of increasing our wealth.

Saving VS Investing:

Broadly you got two hacks to do with your spare money, one is saving in traditional banks and another is investing. Sadly, Saving does not generate anything for you. If you say that you get a lucrative interest at the rate of 8% per annum on Term-deposit then I will request you to check the inflation rate in your country. Sadly, It is equal or more than 8% per annum. Therefore, When you choose your spare money to be locked into fixed deposit you are making nothing but burning your purchasing power in the fire of inflation.

On the other hand, investment is a better choice because it generates the real return for you but every investment plan comes with the drawbacks of risk. However, Investment with the long-term goal and consistent mindset is the open secret of wealth generation and financial success. When you think of investment plenty of options comes to your mind and deciding what routes to opt for is quite hectic.

Investment options:-

Once you choose an investment option you have to stick to this option for a substantial period of time to see some real return pouring into your portfolio. If you fail to do so for any reason your long-term financial goal may suffer badly due to the change in the frequency of investment or investment instruments.

Now, let have a look at what are the common investment options available to you in general. You can invest in Stocks, Bonds, mutual funds, property, and SIP. There are other options available apart from previously mentioned instruments but we will discuss this five investment instruments because they are the most popular.

Stock market investment is a great choice only if you have enough time and skills to analyze the company’s financial statement, macroeconomic trends, a nation’s economic policy, the world economy, and market movements etc. Stock market investment has higher risk & return compared to other investment option. Therefore, sometimes skills and knowledge also do not work. On the other hand, investment in Bond which gives you good return compared to fixed deposits in banks and risk is much lower for a properly rated bond from a renowned rating agency.

The next investment option, which is comparatively less risky than above two option is mutual fund because a board of well-experienced fund managers is there to take care of your money. Here, your money is diversified into various stocks and bonds which minimizes the risk of market volatility and gives a stable return. Equity-oriented and debt oriented mutual funds both are the good options and one must choose his suitable mutual fund investment plan in accordance with his risk appetite and capacity.

All the investment option previously discussed have limitations in terms of high risk of volatility, engagement of time to understand the market and so on. However, the SIP is different from the earlier mentioned investment instruments. It is the best solution for a person who wants to consistently invest for long-term but do not want to do the continuous work of monitoring the market to find out exact timing to enter and exit the market.  In the next paragraph, You will come to know how Systematic investment plan (SIP) works.

 

Systematic Investment Plan (SIP):-

Systematic Investment Plan, commonly known as SIP is an investment medium offered by a mutual fund company to investors which allow them to periodically invest small amounts of money consistently instead of the big amounts at a time. The regularity of investment is usually weekly or monthly or quarterly as per the investor’s ease.

In SIP, a pre-determined amount of money is debited by the investors in bank accounts periodically and invested in a specified mutual fund. The investor is allocated a number of units according to the current Net asset value(NAV) of the mutual fund in which the investor has decided to invest. In systematic Investment plan, every fixed sum invested, more units get added to the investors account on a periodic basis.

The approach of SIP insists on relieving the investors from speculating and research work in unpredictable markets by Dollar cost averaging technique. In Dollar cost averaging technique a fixed dollar (or Rupees in India) amount of a particular investment is purchased on a regular basis, irrespective of the share price. Therefore,  an investor gets more units when the price of mutual fund units (NAV) is low and fewer units when the price is high, which runs down the average cost per unit of a mutual fund.

SIP investment helps to promote disciplined and consistent investment. Systematic investment plans are flexible and investor-friendly because the investor has the option to stop investing in the plan anytime, or may decide to increase or decrease the amount of investment. SIP is usually prescribed to retail investors who do not have the time and resources to continue rigorous investment schedule.

Advantages:-

SIP  is the smart choice for the retail investor. As discussed earlier, SIP investment is a process of investing a fixed sum of money regularly in a mutual fund scheme. SIP enables an investor to purchase units of the mutual fund on a given date each month so that, one can materialize a saving plan as per his needs. The great privilege of SIP is that one need not give time analyzing the market. If an investor fails to track the market right he can miss the rally and may stay out of the market when markets are performing well. In the other alternative, he may enter into the market when all the investments are already overvalued or markets are at the beginning of a bearish trend.

In SIP  an investor can go with his peace of mind instead of banging his head on the table while finding out the exact moment of the entry and exits. His regular SIP investment, automatically made every month, will guarantee that he stays invested at the high and the low and reap the benefit of every opportunity which is hardly possible to predict correctly all the time in advance.

An investor can invest a pre-determined amount in a mutual fund scheme monthly or quarterly as per his preference through cheques or ECS mode. An investor can start investing in SIP by filling up an application form and SIP mandate form given by the mutual fund company on which they need to intimate all his choices.

Disadvantages:-

The SIP works with a consistent investment strategy. Now, consider a situation where you instruct the mutual fund company to buy units on your behalf worth $1000 per month from today onwards and the market become excessively overvalued after a few months. Now, If you forget to instruct your mutual fund company to stop purchase they will keep on purchasing units at a higher price which will raise your average cost per units of mutual fund. Therefore, even if you choose for SIP still you need to keep your eye open on markets to stop and start purchases for best returns. SIP investment while keeping your eye open on the market will surely help you to reduce average cost and maximize returns but again you have to put your time into the task of analysis of markets.

Top performing mutual funds:-

Here is a list of top performing mutual funds scheme as on 2016 suggested by fundsindia.com. These mutual funds help you to stay invested in diversified investment instruments to generate values while keeping the risk at the minimum level. SIP investment with long-term perspective guarantees wealth generation and higher return compared to inconsistent investments in lump-sum amounts.

 List of top mutual fund schemes and their performance.
Scheme Name 3 Year Returns (%) 5 Year Returns (%)
SBI BlueChip Fund-Reg(G) 21.82 13.88
Mirae Asset India Opportunities Fund-Reg(G) 22.58 13.35
Franklin India High Growth Cos Fund(G) 28.06 16.47
ICICI Pru Value Discovery Fund-Reg(G) 27.72 17.44

                                                                                                                                                                                           source: fundsindia.com

Conclusion:-

SIP investment is a good option for those who do not have time and enough resources for the market. SIP helps you to achieve long-term financial goals like children educations, daughter’s marriage, retirement benefits etc. SIP investment helps you to create a well-balanced portfolio which will give a healthy return in one hand and adequate risk reduction on the other hand. Therefore, investing in SIP is a smart choice for a retail investor.

What do you think about SIP investment? You can feel free to share your views in the comment sections. You can also write in the comment section about a point that you think should have mentioned in the article. Thank You.

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About KOUSHIK DAS

I am Koushik Das, and I live in Kolkata, India. I am a passionate personal finance blogger at iplancash.com
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