A systematic investment plan (SIP) is a form of wealth accumulation instrument that enables the investors to increase their quantum of investment in a calibrated manner depending on the market movements. SIPs are exclusively carried out in the form of mutual fund investing.
A SIP is the exact opposite of a lump sum investment. A SIP is one of the best investment options for individual and institutional investors. The capital is invested gradually on a fixed date and at a fixed some. The mutual fund in which the SIP is invested is all fixed.
SIP is a tax-saving measure that is mainly purchased at the time of tax declarations. Since stock prices are variable, the profits on a SIP are earned when the price difference is calculated depending on how many units the investors have purchased according to their daily value.
Investing in a SIP entails debiting a specific amount on a fixed date on a monthly recurring basis at a specific mutual fund house. A SIP is a potent financial tool that helps you accumulate savings over the long term. One of the amazing benefits of using a SIP is that even a small quantum of investments has the potential to earn interest.
How Does SIP Work?
A SIP is an excellent tool of wealth management that helps in the massive accumulation of savings. Let’s imagine that you have Rs: 20,000 in your bank account, which does not yield significant profits for you. Due to these reasons, you have decided to invest the total in SIP-related mutual funds. You can invest the entire sum to purchase the unit-linked portfolios. However, the advantage of compounding interest is missed when the investment is made in a large quantity.
Secondly, there is the issue of liquidity. All lump-sum investments cannot be easily converted into cash quickly, and you may face a cash shortage in case of emergencies. This is due to the existence of the lock-in period clause in most the lump sum investments,
The SIP breaks down the core amount of Rs 20,000 into small blocks of Rs. 5000 or Rs. 2000. This ensures that you receive the Net asset values for investments as low as Rs 500. The main principle behind SIP is the rupee cost averaging, which helps you buy units at different prices. The price fluctuations do not cause excessive volatility in your unit prices.
There are three different kinds of SIP:
Flexi SIPs work based on a pre-derived formula that alters the number of investments after factoring in the various market conditions.
Perpetual SIP does not have a fixed end date. The plan continually allows you to invest regular amounts in the SIP plan. Stopping the SIP investment can be done by filling out a form.
Step-up SIPs aid you by increasing the premium amount of pre-running SIPs. The existing premium amounts can be topped up by investing the surplus amounts that come in a windfall fashion.
How Does SIP Investment Help to Accumulate Wealth?
SIP investments are known to make a massive difference to the health levels of the investors through the deployment of computing. The power of compounding ensures that the accumulated profits are also entered into the category of interest accruals.
Let us consider an investment of Rs 1 lakh at an interest rate of 10 %. The interest amount calculated when added to the principal takes it to a whooping sum of Rs 61,000. In this, the interest gains include the quantum of money achieved through the original interest rates,
The best SIP to invest in is the one in which time compounding takes place. The highest returns are achieved on those amounts which are invested for a lengthier period. If an investment sum of Rs 1 lakh is invested, then the annual return rate is applied at 20 percent, then the total investments will grow into a massive figure of Rs 1.7 Lakh which means that you have achieved a profit of 70,000 through the SIP.
Substantial wealth can be generated by ensuring that relatively modest investments are made across the main corpus of SIP. There are excellent outcomes that can be fulfilled using the financial resources of SIP, such as retirement planning, higher education of the children as well as their marriages which can now be conducted thanks to the wealth accumulated through SIPs.
Benefits of Investing in SIP
Some benefits of investing in SIP are as follows:
Rupee Cost Averaging
This concept ensures that your principal does not undergo volatility in the stock market. The total outcomes of investments will deepen the rupee costs depending on the global markets. One of the important steps to be taken when buying a SIP is to purchase a SIP at as low a cost as possible. This way, a higher number of units can be purchased, resulting in a fixed profit over a predetermined time.
Power of Compounding
Compounding interest is applied to SIPs which make for attractive returns in the short and long term. Investors need not wait for long periods to see their precious investments grow. The time has come for the power of compounding to enhance the returns of the best SIP in the market. Even when the amounts invested are as low as Rs 5000, the redeeming feature of SIPs is that every penny of the investment works tirelessly to enhance your wealth every waking minute of your life.
An excellent opportunity for portfolio diversification is the SIP. Stock markets are subject to volatility risks and should be addressed using the speed of the investments. Those who invested in SIPs will fare better than those who have invested in the stock market.
The area of financial discipline is constantly rejuvenated using the excellent benefits of investing in a SIP. All intervals of SIP investments are spaced out so that the quantum of premium payment for the SIP will not become an invincible burden to the investor. The top-ups of the SIP can be conducted effortlessly, ensuring the enhancement of incomes across the various volatile times of global trade. The investing mechanism has also achieved modern payment methods. All investments can be carried out on our mobile phones,
SIPs are some of the potent financial weapons of the modern economic landscape. With huge returns from minimal investments, these SIPs are guaranteed to evoke emotions of happiness through achieving prosperity. When compared to the share market, the safe returns of the SIP ensure that the market discipline allows you to thrive in your personal and professional lives.
Using the interest amount in the final calculation of profits is essential. Portfolio diversification is also interesting, allowing you to spread risk across multiple areas, thereby safeguarding your principal amount.