How do SIPs Enable a Well-Planned Investment?

SIP investments are replacing the traditional investment methods. Read this article to find out why such a situation prevails.

In the US city of Seattle, Washington D.C., an average American wastes nearly 6 days of his life struggling with traffic jams, every year. While the rising number of immigrants to the country is one of the factors that contribute to the cause, the rising number of cars is a bigger problem which the country is facing right now. With the introduction of easy instalments, there has been a surge in the number of car buyers. The instalment system makes it very easy for the buyer to buy even the most expensive thing in the world.

The SIP is a similar version of financing, with the only difference of the end product. Under an SIP plan, you can buy a stake in even the top most mutual funds with ease, as the payments are easy and on a monthly (even quarterly in some cases) basis. However, the easy payments isn’t the only thing that makes an SIP arrangement superior to other investment options. And this article will tell you about the other important features that make this investment system great. So, let’s find out the reasons together!

How does an SIP Investment Work?

Before we skip to discussing the features of an SIP investment, it is important to understand how this arrangement works. Basically, an SIP investment plan is just like your normal bank borrowing, where the principal amount is broken into smaller instalments and falling due on different dates till maturity. Under an SIP arrangement, the investment budget is broken into small bits starting from ₹1000 (₹500 in some cases), which can further be increased in the later months if the investors choose to do so.

Upon doing so, the investors get the freedom to invest their budget at different points of time, thus bypassing the need to invest the entire amount at once. This ensures that the funds are invested systematically over the course of the investment period, and the remaining budget can be invested in other high-performing avenues.

The Features of Systematic Investment Plan

• The Compounding Effect
Albert Einstein, one of the greatest physicist to ever live on Earth, termed compounding as the eighth wonder of the world. He was so much in favour of compounding that he openly berated people who neglected this idea and went on to make simple, non-compounding investments. When you are buying an SIP plan, you are exposing your funds to the power of compounding. This will lead to a better income in the long run, as the income earned on the principal amount will be replenished in the fund to generate more returns.

• The Averaging of Unit Cost
Not only does an SIP investment enables you to take advantage of compounding returns, but also chisels down the average buying cost of a unit in the fund. For instance, if you were to buy 100 units in a mutual fund on 1st January at ₹10 per unit, you’ll spend ₹1000 in total to avail the units. Later, if the price escalates to ₹11 per unit, you’ll spend ₹1100 for another 100 units. This means that the average cost of buying 200 units was ₹10.5 [(₹1000 + ₹1100)/200 units], all thanks to the systematic SIP investment. So, when the price is running high, you’ll fetch less units and vice versa, thus pulling down your overall investment cost.

• More Liquidity
Since an SIP arrangement allows you to invest smaller amounts at different intervals, you’re left with a considerable amount that you could otherwise use in other profitable ventures. There will be sufficient capital left with you to look out for avenues that could prove worthy for your portfolio. In other words, there is a win-win situation with an SIP investment plan if you do it correctly.

You might have come across many legends stating that mutual fund investments are risky, and indeed they are. But, the difference lies in how you proceed towards making an investment in them. If you are going through the SIP route, you need not worry about how the past has seen mutual fund investing.