What are SIPs and How do they work?
A Systematic Investment Plan (or SIP) is a type of mutual fund investment that allows you to invest over time. It is a systematic method of investing fixed quantities of money on a regular basis, as the name implies. This can be done on a monthly, quarterly, or semi-annual basis and It may be easier to reach your financial goals if you invest consistently in this manner.
The Benefit of Investing in SIP
- SIPs promote financial discipline because they are made on a regular basis. It encourages forced savings and aids in the accumulation of a nest egg without compromising your lifestyle.
- SIPs provide you more options when it comes to investing. You have the option to increase or decrease your contribution at any moment.
- SIPs are a simple and convenient way to invest. With a one-time set of instructions, you can quickly accomplish it online. Your SIPs will begin to collect automatically.
- Larger capital risk is associated with lump-sum investments. A SIP spreads your investment over time, lowering the risk to your savings and allowing you to better manage volatility.
How do SIP Work?
SIPs operate on the following two principles:
1) Rupee Cost Averaging
By removing the guessing game of market performance, SIPs can help you avoid market volatility. In the long run, regular investing guarantees that the average purchase cost is evened out.
You receive less units when the markets rise, and more units when the markets fall. This reduces your risk and ensures that you buy investments at a lower average unit cost.
2) Compounding
Because of the compounding effect, saving a small amount of money on a monthly basis for a lengthy period of time can have a huge impact on your investment. Regular investments over a longer period of time offer higher returns and profits.
Customizing SIP
SIP investments in the monthly format are preferred by a number of investors .This is due to the fact that individuals can deposit the SIP amount straight into the fund when they receive their monthly paychecks. There are, however, a variety of different solutions available to you.
a] Frequency of SIP
SIPs are available from mutual fund firms on a weekly, fortnightly, quarterly, or semi-annual basis. You can also invest for the future without committing to a specific time frame. The ‘Perpetual SIP’ option allows you to do this.
b] Perpetual SIP
You can simply transfer a fixed amount into the mutual fund on a regular basis for as long as you desire using this option. Give your bank account a standing instruction, and the money will be moved on a certain day. This is a fantastic option if you have a substantial financial objective in the future (retirement, child’s wedding expenditures) and want to build a huge corpus.
c} SIP step-up
You can’t step-up or increase your SIP investments on a regular basis with the step-up SIP option.