A SUV, a home of your own or a vacation to the Niagara Falls- do you fancy any of these? If your answer is in affirmative, then giving a mandate to the bank for a monthly deduction of an amount can work in your favour. No, we are not talking about recurring deposit where you deposit a small or fixed amount every month. In fact, we are talking about Systematic Investment Plan or SIP as it is commonly known. This is an investment plan offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund Scheme at weekly, monthly or quarterly intervals by giving standing instructions to the bank. A SIP route can be taken up by anyone with a regular and steady stream of income. It can be made in equity, debt and gold mutual funds as per one's financial goal. For instance, if the goal is far away, a SIP in equity fund works best.
It can be started with as little as Rs 50 per month. However, such a small amount won't help in wealth creation despite good returns. So while giving mandate to your bank for SIP, it is important to take into account the corpus and the time frame eyed by you.
Over the past few years, SIP has generated lot of interest amongst investors. As per Association of Mutual funds (AMFI), there are about 1.59 crore SIP accounts through which investment is made regularly. During FY 2017-18, MF industry added about 8.55 lacs SIP accounts each month on an average. The average SIP size was about ?3,275 per SIP account. Here's why a monthly deduction from your bank account in the form of a SIP can benefit you. The latter will help you reach your financial and life goals by offering following benefits.
A number of people enter the markets with a lot of enthusiasm but fail to maintain a monthly investment towards building an investment corpus. When it comes to investing for a particular financial goal in mind, it is necessary to maintain a discipline in order to achieve it. A monthly deduction by the bank in the form of SIP does just that.
Offers benefit of compounding
We all know how compounding benefit us by reinvesting the interest earned. It leads to a massive difference in the corpus accumulated over a long period of time. A small amount invested regularly can turn into a very large corpus. To reap the maximum benefits, it is always better to start investing early. A regular small amount periodically early on is always better than a large lumpsump later in life.
Averages your purchase cost
It is impossible to time the market. SIP takes emotion out of investing with rupee-cost averaging approach. Through SIP, the investor takes advantage of market dips without worrying. His money buys more units when the price is low and fewer when the price is high. The cost averages out over a period of time.
Take for instance a SIP of Rs 5000 every month in a fund whose NAV is Rs 20. For first month the NAV is Rs 20 thus 250 units get credited to your account. However, if in next month the NAV falls to Rs 10 then 500 units get credited to your account. This results in averaging out the cost over a period of time.
SIPs are flexible too. They can be made in open-ended funds where the investors can invest and take out the money anytime. Moreover, it is possible to pause the SIP or withdraw should you require the funds. However, it is best to not adopt this strategy to achieve your financial goal.