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Systematic Investment Plan : Working & Benefits

Systematic Investment Plan (SIP) : It is very important that you save some part of your earnings in order to secure your future. Earnings of each individual differs and so should the savings amount. It is advisable to save at least 30% of your earnings each month. You must divide your savings into different schemes rather than saving at one single place. When we talk about an investment, a new name has been heard in recent years i.e., Systematic Investment Plan. A lot of people want to know more about what actually is a Systematic Investment Plan, how does it work and what are its benefits. Today, we will answer all these questions related to SIP.

Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP)

Let us first know more about the systematic investment plan, they way it works and the benefits of enrolling in a systematic investment plan.

What is a Systematic Investment Plan ?

A Systematic Investment Plan (SIP) is a smart and hassle free way of investing money in mutual funds. SIP helps you to invest a pre-determined amount at a regular interval, may it be weekly, monthly, quarterly, etc. A Systematic Investment Plan is a considered to be a planned approach towards investments which helps you get disciplined with the habit of saving and building wealth for a better future.

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How does SIP work ?

Systematic Investment Plan (SIP) works on the principle of making regular investments. It is quite similar to a recurring deposit where you save in a small amount every month. SIP allows you to invest your money in a Mutual Fund by making smaller investments periodically (monthly or quarterly) instead of a heavy one-time investment. Example :- By investing through SIP you can pay 10 periodic investments of Rs 500 each instead of a one-time investment of Rs 5,000 in a Mutual Fund. In this way you can easily invest in a MF without making any changes in your other financial liabilities. The Benefits of SIP given below will help you get a better understanding of working of SIPs through the concept of rupee cost averaging and the power of compounding.

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With the introduction of SIP, mutual funds are now within the reach of an average person as it allows to invest as low as Rs 500 or Rs 1,000 on a regular basis instead of making a big one-time investment.

Systematic Investment Plan may not seem quite appealing at first, but as the time goes on it enables investors to get into the habit of saving. If you carry on your SIP for a longer term it can add up and give quite high returns. If we take an Examle, A monthly SIP of Rs 1000 at the rate of 9% would return Rs 6.69 lakh in 10 years, Rs 17.83 lakh in a period of 30 years and Rs 44.20 lakh in period of 40 years.

Benefits of Systematic Investment Plan (SIP)

Not only SIPs can return you a high return in a longer period, it also has some benefits which you must like to know. Let us tell you the advantages or benefits of Systematic Investment Plan.

1) Helps Maintain Discipline 

The main rule to get financially strong in a longer period is to stay focused, invest regularly and maintain discipline while making investments. A small amount of savings every month will not affect your finances. With the small amount of savings every month it would be easier for you to save, rather than saving large sum for investing in one go.

2) Power of Compounding

To be a successful investor you need to start early. Since all mode of investment and returns are based on the power of compounding, an investor who starts out early in life can earn a lot higher returns than the one starting out late even with a bit higher investment. Since a SIP do not need a large amount of investment to be made and an individual can start investing with a low amount every month depending on the financial condition, it allows them to start their investment a lot early in life.

Let us take an Example of Mr.A and Mr.B to understand how does the power of compounding helps the investor using a systematic investment approach. Mr. A started investing in a SIP with a sum of Rs. 1000 when he was 30 years old. Till the time Mr. A reaches 50 years of age, he would have invested Rs. 24 Lakhs if the money grew with an average rate of 7% p.a. Let us now consider that Mr. B starts earlier in life than Mr. A and started investing the same amount of Rs. 1000 since he was 20 years old. If the investment of Mr. B grows at the same rate of 7% per annum would give a return of Rs. 36 Lakhs by the time he is 50 years old. So by our example we found that Mr. A and Mr. B invested same amount every month, however one starting out early in life has made a tremendous gain compared to the one starting out late.

3) Rupee Cost Averaging

Rupee cost averaging works out really well for investments in equities. However, while investing the same amount in a mutual fund at regular intervals, you tend to buy more units when the price is lower. In this way you would reduce your average cost per share (or per unit) in a longer period. This strategy to reduce your average cost per share (or per unit) is called ‘rupee cost averaging’. If you make a sensible and long-term investment, rupee cost averaging can smoothen out the ups and downs of the market and will help reduce the risks of investing in volatile markets.

Individuals who invest through Systematic Investment Plans cope up easily with the highs and lows of the market. With an investment in SIP, your average investment cost comes down.

4) Convenience

SIP is a known to be a very convenient way of investing money. You just need to submit cheques with the filled up enrolment form. The cheques will be deposited on the requested date by the mutual fund and the units will be credited your account. You can also check SIP related details buy the desired units of SIP online. You will also be getting the confirmation for your transactions.

5) Other Benefits

Some other benefits of SIPs are that there no entry or exit loads on your investment in SIP. One more important advantage of SIP is that all the Capital gains,wherever applicable are taxed on a first-in, first-out basis.

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