Systematic Investment Plan is considered to be a smart method used for the purpose of investing in mutual funds. This facilitates investment in specific pre-determined amount at accepted interval periods, which may be weekly, monthly or even quarterly. This is considered to be a planned method of investment and is also said to instill a saving habit, which is primarily why it has become popular.
How it works
An SIP is designed to be flexible and come out as an easy and simple investment plan. The money you agree to is automatically debited from your account, which is then invested into a predetermined mutual fund scheme. The units are allocated based on the present market, which is called the net present value or the NAV.
So, this means, upon further monetary investment, additional units of the said scheme will be added to your credit. Therefore, you will possess units that have been bought at different going rates, ultimately benefitting from the Power of Compounding and Cost Averaging at the time of valuation.
Cost Averaging and Power of Compounding
The markets are always volatile, causing most investors to be unsure of the best time to enter the market of investments. Cost averaging ensures that your investments are not troubled by such uncertainties. As a regular investor via SIP, you can get more units depending on the phase of the market, which is more when the price is low and less when the price soars.
The rule for compounding is very easy and universally accepted. The golden rule is that the sooner you start investing, the more time your money will have to grow and multiply. Albert Einstein once stated that according to him compound interest is the eighth wonder of the world!
Advantages of Systematic Investment Plans
1. Saving: Regular savings facilitate successful investments. Through SIP, you develop the habit of saving, without the risk of procrastination.
2. Flexibility: Investments over the long term can be extremely beneficial. Having said that, there is no compulsion and you as an investor have the freedom to discontinue the scheme at any given point of time. Also, there is flexibility in the amount of investment made.
3. Convenience: It is considered an uncomplicated method of investment, which easy to understand and simple to execute, with a standing instruction for automatic debit given to the financial institution you hold an account in. There is no penalty on discontinuation of this hassle-free mode of investment. This makes it an ideal mode to save and multiply money.