SIP: Why systematic investment plans under mutual funds are highly gratifying

A mutual fund is a company that collects money from several investors and pools the amount for investment in equities, bonds and money market instruments. These are a good choice for people who are not completely risk averse and want higher returns in the longer run. Mutual funds do not just offer lump sum investments. There is also the option of Systematic Investment Plans (SIP). SIP allows individuals to put in a fixed sum of money at regular intervals. The amount can be as low as Rs 500 per month.

SIP enforces a habit of regular savings in investors. They have several advantages. Here is why systematic investment plans under mutual funds can be highly gratifying.

Benefits of systematic investment plans

Rupee-cost averaging: SIP means that the person invests a fixed amount at regular intervals, no matter what the market conditions are. This means you can buy more units when the fund’s net asset value (NAV) or the cost of a single unit is low. Conversely, you will be able to buy fewer units when the market is on a bullish run. SIP enables investors to ride out any short-term market fluctuations with rupee-cost averaging.

Compounding: The returns generated on mutual funds are reinvested, increasing the value of the portfolio over time.

Professional management: Since mutual funds are managed by professionals, the investment decisions are likely to be based on extensive research. This means the fund can give higher returns compared to other options.

Financial discipline: SIPs enable people to start investing early and regularly. One can inculcate the habit of saving money and investing it to create a corpus from the early days of their career.

What are the types of SIP?

Perpetual SIP: These plans allow you to carry out systematic investments without an end to the tenure date. They are best for long-term investors.

Flexible SIP: These plans allow investors to increase or decrease the money they put in according to their financial needs.

Top-up SIP: Investors can periodically add extra money to their SIP when they have the funds.

Is SIP a good idea for investment overall?

SIPs allow people to invest in mutual funds without the risk of putting in a large amount of money as a lump sum. It allows one to make solid financial plans for the future. Though mutual funds are riskier compared to other investment options, SIPs can help negate short-term market fluctuations to a great extent. These investment options can be a great idea, particularly if they are coupled with some fixed-income instruments like term deposits