Don't have a lot of money to invest upfront? No problem! With SIPs, you can invest small amounts regularly and watch your wealth grow over time. SIP i.e., Systematic Investment Plan is a way to invest small amounts of money regularly over a period of time, rather than investing a large sum all at once. This article throws light on the benefits of SIP investing and also explains how to maximize returns with this strategy.
There are several benefits of investing through systematic investment plans (SIPs):
1. Affordability:
SIPs allow you to invest small amounts of money regularly, rather than a large lump sum upfront. This can make it easier to invest if you don't have a lot of money to spare at once.
2. Discipline:
SIPs help to instill discipline in your investing habits by requiring you to make regular contributions. This can help you stick to your investment plan and avoid impulse decisions.
3. Cost averaging:
By investing a fixed amount of money at regular intervals, SIPs can help to smooth out the impact of market fluctuations on your investments. For example, if you invest Rs.1000 per month through a SIP, you will buy more units of the fund when the price is low and fewer units when the price is high. This can help to lower your overall average cost per unit and potentially increase your returns over the long term.
4. Convenience:
SIPs are convenient because they allow you to automate your investments, so you don't have to remember to make a contribution each month. You can set up a SIP through a mutual fund company or financial advisor and choose the frequency and amount of your contributions.
5. Flexibility: Most SIPs allow you to adjust the amount of your investment or the frequency of your payments at any time, so you can increase or decrease your contributions as needed.
Conventional wisdom in the stock market says that one must buy on dips and sell on rallies. Many investors use the same philosophy for their SIP investments. Investors think it is wise to stop making fresh investments and discontinue their SIPs when the market moves higher or hits a new all-time high. Some also consider booking profits they are sitting on, thinking that they could invest at lower levels when the market corrects.
This can prove to be costly for the investor due to a number of reasons:
Buying the dip strategy doesn’t work in the long run.
Why?
Because while you await the ideal dip you planned to invest in, you find that it never comes.
By trying to time the entry and exit in the market, you can miss out on the best days or months of compound growth resulting from the rising market. This in turn can affect the average return on your investment.
In order to make higher returns, it would be necessary to know exactly when the market bottoms. However, in reality no one can know this with certainty.
Thus, waiting for the buy the dip opportunity can be futile. You would be better off if you just kept investing without worrying about the market levels and stayed invested.
In fact, if you have already started an SIP, it is advisable to consider starting another one in a different mutual fund or asset class to diversify your portfolio since diversification helps to spread risk across different investments and can potentially improve your long-term returns.
To get the most out of SIP investing, it's important to keep a few key points in mind:
Start investing early: It's important to start investing through an SIP as early as possible to take advantage of the power of compound interest.
Stick to your investment goals: Clearly define your investment goals and assign a time horizon and target to each of them. This will help you determine which asset class to invest in and how much to invest each month and avoid investing randomly through an SIP.
Choose growth over dividend option: For long-term wealth creation and to fully leverage the power of compound interest, consider choosing the growth option over dividends. By allowing your gains to remain invested in the growth option and maintaining a long-term perspective, you can maximize the benefits of compounding.
Stay invested at all times: The goal of investing through an SIP is to take advantage of market volatility. Don't stop investing when markets fall, as these may be the best times to invest in the stock market. While investing through an SIP can help to smooth out the market volatility in the long term, an investor is likely to witness poor or negative short-term returns at times. Keep your focus on long-term results rather than getting distracted by short-term uncertainty.
Avoid over-diversification: Investing in too many mutual funds can lead to over-diversification and make it difficult to monitor your portfolio. This can result in underperforming funds dragging down the overall returns of your portfolio.
When you invest through a SIP, your average holding period is the length of time that you hold your investments in the fund, on average. This is calculated by dividing the total length of time that you hold your investments by the number of investments you make.
For example, if you invest in a SIP for a period of 4 years and make monthly contributions, your average holding period would be approximately 2 years (4 years / 12 months per year = 2 years). This means that, on average, you would hold each of your investments in the fund for approximately 2 years.
As a general rule, the longer you hold your investments, the more is the scope of its potential growth. However, it's also important to regularly review your investment portfolio to ensure that it is still aligned with your financial goals and risk tolerance.
In the case of an asset class like equity, an average holding period of 2 years may not be considered adequate. This is because equity investments can be volatile in the short term and may require a longer time horizon to achieve their full potential returns.
Combining periodic lump sum investments with regular investments through a SIP can be a good strategy for investors who want to take advantage of both good and bad market days. When you invest a lump sum amount, you are buying a large number of units of a mutual fund all at once. This can be beneficial if the market is in a temporary downtrend, as you will be able to buy more units at a lower price. This can potentially lead to higher returns when the market recovers.
Overall, SIPs can be a good investment strategy for investors who are trying to build wealth over the long term. By averaging out the cost of investing and providing a convenient way to invest, SIPs can be an effective way to help investors stay on track with their financial goals.
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