When it comes to investing, we unnecessarily complicate the process with thinking about it too much – like, when to start? Where to invest? How much to invest? What if the investment tanks?
Investment is the best way to grow your money and to fulfil your future needs. As savings are never enough and money never grows when just kept in your bank accounts. Talking about investments, there are many investment plans available in market but SIP with mutual funds is the one which is now a days considered best among all the investment plans.
Understanding SIP!
Systematic Investment Plan commonly known as SIP is basically a mode of investment with mutual funds. It is a long-term investment plan generally with the tenure of 10 to 15 years, where one can invest their money periodically which can be daily, weekly, monthly or quarterly options and gets Units of mutual funds.
SIP help investors to bring a discipline to their investment methodology.
Advantages of Investing through SIP
SIP is Pocket Friendly
SIP allows to invest in chunks not in bulk this facility with SIP makes it pocket friendly. There is no compulsion that one needs to invest a big amount, one can even start SIP with a minimum of Rs.500 monthly.
SIPs Enables Rupee-cost Averaging
It’s a fact that SIP works better than other investment plans available in the market which allows lump sum payment, and this is because of rupee-cost averaging.
Under the rupee-cost averaging one can typically buy more of a mutual fund unit when the prices are low, and similar vice versa. This contributes to a good discipline.
| Month | Amount | Rising Market | Falling Market | Volatile Market | |||
| NAV (Rs.) | Units Allotted | NAV (Rs.) | Units Allotted | NAV (Rs.) | Units Allotted | ||
| 1 | 10000 | 10.00 | 1000.00 | 10.00 | 1000.00 | 10.00 | 1000.00 |
| 2 | 10000 | 12.50 | 800.00 | 9.25 | 1081.08 | 10.83 | 923.36 |
| 3 | 10000 | 12.68 | 788.64 | 8.95 | 1117.32 | 11.00 | 909.09 |
| 4 | 10000 | 13.05 | 766.28 | 8.42 | 1187.65 | 10.50 | 952.38 |
| 5 | 10000 | 13.72 | 728.86 | 8.05 | 1242.24 | 10.23 | 977.52 |
| 6 | 10000 | 13.98 | 715.31 | 7.00 | 1428.57 | 10.65 | 938.97 |
| Total | 60000 | 12.50 | 4799.09 | 8.50 | 7056.86 | 10.52 | 5701.32 |
On investment of Rs.10000/- per month, in different market scenarios, you can see how many units are accumulated. In rising markets 4799.09 units, in Falling market 7056.86 units and in volatile market 5701.32 units are accumulated. So, while in falling market one must invest more to get maximum units but in actual sense, they tend to redeem all the units.
SIP have the Power of Compounding
Compounding occurs when the returns you earn on your investments start earning returns. Over time, this result in a snowball-effect, that may increase your potential returns manifold.
| Name | Age | Monthly SIP (Rs.) | No. of years | Investment Amount | Value at age 60 yrs (Rs.) | Gain |
| Mr. A | 20 | 1000 | 40 | 4,80,000 | 3,14,03,755 | 3,09,23,755 |
| Mr. B | 30 | 1000 | 30 | 3,60,000 | 70,09,821 | 66,49,821 |
| Mr. C | 40 | 1000 | 20 | 2,40,000 | 15,15,955 | 12,75,955 |
The above table shows the investments of Rs.1000/- per month by Mr. A, Mr. B and Mr. C, but the time horizon of investment differs. Mr. A did monthly investment for 40 years and earned Rs.3,09,23,755/- returns on his investment of Rs.4,80,000/-, Mr. B did monthly investment for 30 years and earned Rs.66,49,821/- returns on investment of Rs.3,60,000/- and Mr. C did monthly investment for 20 years and earned Rs.12,75,955/- on investment of Rs.2,40,000/-. So, we can understand by this example that investing regularly for long term earns more return due to power of compounding.