The common belief that women are frivolous with their money and are not good at investing is now a thing of the past. Many young employed individuals, both men and women, are struggling to save money due to their high lifestyle expenses. Similarly, a large number of middle-class women, especially, find it difficult to save any money for investment due to rising household and family expenses. In today's era of gender equality in employment and economic empowerment, SIP (Systematic Investment Plan) has emerged as the most popular choice for both men and women. It not only offers interest on their savings but also helps them achieve their financial goals in the long term with little money in hand. This article provides a comprehensive overview of SIP investing, highlighting both its benefits and limitations. By the end of the article, you will have a thorough understanding of SIP investing, allowing you to make an informed decision and begin your wealth-building journey with confidence. Start your SIP journey today and watch your wealth soar!
What is Systematic Investment Plan (SIP)?
Systematic Investment Plan (SIP) is a popular investment strategy in which an individual invests a fixed amount of money in a mutual fund scheme at regular intervals, typically on a monthly basis. The regular investments made through SIP help to average out market fluctuations, leading to lower overall stock market investment risk. SIPs thus provide a consistent and structured approach to investing, making it accessible to individuals looking to build wealth in a systematic and manageable way and helps achieve their financial goals. There are various modes of starting a SIP investment, including Electronic Clearance Service (ECS) from bank accounts and cheques. The duration of the investment can be specified and if you wish to discontinue the SIP, all you need to do is inform the fund 15 days prior to the payout.
ADVANTAGES OF SIP INVESTING:
1. Rupee Cost Averaging:
SIP operates by having you invest a set amount each month into your selected mutual fund. During market lows, your SIP investment will buy more units of the fund and during market highs, it will purchase fewer units. Continuously investing through this method over an extended period allows you to achieve a favorable average purchase price for your units despite market fluctuations over the long term. This process is known as rupee cost averaging. This helps to mitigate the impact of market volatility and instead of being fearful of it, the investor can take advantage of it as SIP investments benefit from high volatility. This is expected to result in a substantial rate of return in the long run.
2. Instilling discipline and consistency in investors:
Investing through SIPs provides a disciplined and convenient approach towards investing. Even small amounts of money can be invested regularly, making it a great option for individuals who have limited funds. By committing to regular SIP investments, an investor is less likely to be influenced by market fluctuations and emotional reactions. This helps investors stay disciplined and consistent with their investment plan.
Investing through a SIP is thus useful for investors who have a steady income. By investing a small amount regularly, over time, a substantial corpus can be built, thereby allowing the investors to meet their long-term financial goals such as education and marriage expenses for children, retirement, etc.
3. Long-term wealth creation:
When you invest regularly through SIPs, the returns generated from your investments are reinvested, creating a compounding effect. The concept of compounding in investment refers to the accumulation of returns on your investments over time. This leads to an increase in potential returns over the long term. To maximize the benefits of compounding, it is recommended to invest with a long-term time horizon and start investing as early as possible. The longer the investment period, the greater would be the potential returns and greater would be the wealth creation. The flexibility to invest small amounts each month eliminates the need for a lump sum and the power of compounding can help create a significant portfolio over time. Whether you are a beginner or an experienced investor, SIP is an attractive option to consider for your long-term investment portfolio.
4. No need to time entry and exit from market:
SIPs reduce the risk of investing by using Rupee Cost Averaging discussed above and this eliminates the need to time the market. The average cost of units is thus lower in the case of SIPs, compared to lump sum investments. The power of compounding also comes into play, as small investments grow over time. It is however important to consult an investment advisor for the right allocation to the right schemes, based on investment objectives, risk appetite and time horizon.
5. Simplicity of investing:
SIPs are a convenient and hassle-free mode of investment. Each fund has its own minimum amount, which can range from as low as Rs. 500 to Rs. 1,000 per month. One of the biggest challenges in equity investing is timing the market, but with SIPs, this is no longer a concern. It provides a disciplined approach to investing, regardless of market conditions, making market timing irrelevant. With a positive outlook towards economic growth over the long- term investment horizon, regular investments through SIPs are expected to yield handsome returns.
6. Automation of investment:
SIPs offer a convenient and effortless way for investors to save and grow their money. By investing a fixed amount each month, an investor's earnings pattern is aligned with their investment strategy. Since most individuals don't have a large sum of money to invest all at once, SIPs enable them to set aside a portion of their income each month for investment. Additionally, once a SIP is established for a certain period, such as three years, it operates on auto-pilot, freeing the investor from having to manually place orders or evaluate their fund's performance on a regular basis. This is in contrast to investing in an Exchange Traded Fund (ETF), where one has to actively place orders each month. The automatic nature of SIPs helps ensure that individuals stay on track with their investment goals and don't miss out on regular investing opportunities. Once an ECS mandate is set up, the investor only has to periodically check the performance of the fund and doesn't have to make any active decisions, making it a convenient option for those who struggle with being proactive with their investments. Thus, SIPs offer a convenient and hassle-free investment option, as they operate on an auto-pilot mode. This eliminates the need for constant monitoring and reduces the chances of missing out on regular investments due to work and personal commitments.
7. Low initial investment and low risk:
The advantage of SIPs is that they allow individuals to match their investment pattern with their income. Many retail investors do not have a large sum of money to invest, but they can still invest in mutual funds by setting aside a portion of their monthly income through SIPs.
By investing a fixed amount at regular intervals, instead of a lump sum, you spread out your investments over time and lower the risk of significant loss in case of market correction. On the other hand, investing in a lump sum carries the risk of missed market opportunities, as it requires predicting the direction of the market and making investment decisions at the right time. This can be challenging for most retail investors, making SIPs a better and more manageable investment option.
SIP investments are spread out over time, reducing the risk of investing a large sum at once. This helps to lower the overall risk of the investment.
LIMITATIONS OF SIPs:
1. Lack of Diversification:
Investing all of your money in just one mutual fund scheme, especially a risky one, can result in significant losses if it performs poorly. To mitigate this risk, it is important to spread your SIPs across a diversified portfolio of mutual funds with a mix of large, mid and small market capitalization and a balance between growth and value styles.
2. Trailing behind a lump-sum investment:
Just as one size doesn’t fit all, the same investment method does not guarantee returns across all market sectors. A SIP in an index fund or multi cap fund may be a great idea. However, it is best to avoid SIPs in sector funds, which are more focused and can result in losses if the sector goes through a bear phase. In this case, a lump-sum investment may perform better in a rising market and it may be wise to exit this investment due to its rotational nature when the sector enters correction mode. It is however difficult to predict such market conditions and most investors do not have a large amount of money available to invest all at once to take advantage of such rotational sector movements.
3. Market Timing:
To maximize the benefits of an SIP, it is crucial to link it to a long-term goal, such as saving for retirement or a child's education. Even if there are market fluctuations, it is essential to continue with the SIP without making any changes. Many investors tend to enter equity mutual funds during a bull market and a surge in SIP investments is generally witnessed during this period. However, when the next market correction occurs, investors consider halting the SIP investment since they are not sure about how deep the correction would be. It is however important to resist the temptation to stop the SIP or withdraw the funds and instead it is advisable to weather the market fluctuations and wait at least five years before making any changes. This is because SIPs perform well during bear markets, as they allow you to buy more units of the fund with the same amount of money. The longer the investment horizon, the lower the risk of making a loss in the equity markets.
4. No guaranteed returns:
It is important to note that SIPs are not a guarantee for positive returns in all market conditions. If the market were to experience a steep decline, like in the year 2008, even long-term SIP investments could result in negative returns, particularly if you started investing when valuations were high and the market then plummeted.
5. Performance based on market conditions and fund selection:
While SIP investing is popular, it is important to remember that SIP alone is not enough to ensure good returns. The key to successful SIP investing is choosing the right fund, as this will ultimately determine your returns. When evaluating a scheme, it's important to consider several factors such as past returns over a long period of time, risk ratios, the quality of the fund house, the profile of the fund manager and adherence to the investment objective.
Thus, choosing a high-quality fund is crucial to earning good returns and to maximize the benefits of SIP, it's important to select a quality fund at the start and regularly evaluate its performance every six months to a year.
Conclusion
SIP is a disciplined method of investing that allows you to make multiple small deposits over a longer period of time into a mutual fund. If you can spare about Rs 1000 every month, you can invest that amount under a SIP and benefit from the expertise of seasoned fund managers, just like any other big investor. Your investments in SIP are relatively safer than equity or other instruments because most mutual funds make diversified investments across multiple industries and entities, which reduces the risk as compared to investing in a single entity. During periods of high market volatility, one part of the mutual fund's investment can balance the drop in price of another instrument. With SIP, you can build wealth with a diversified portfolio over a longer time frame. SIP is thus a convenient and hassle-free way to invest and achieve your financial goals but understanding the essentials of how to pick the right SIP is crucial for your investment success.
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