Systematic Investment Plan: How Advantageous It Is For the Investors


We all have one common desire, i.e. to become financially strong. But merely thinking about it is not sufficient; we have to work hard and take some action for achieving that desire. So, before moving towards it, we need to know what can help us to reach there.

Everyone is aware that only money has the power of creating monies. Hence, the savings that we owe are the sources of reaching the financial goals and SIP – Systematic Investment Plan is the route for the same.

What is SIP – Systematic Investment Plan?

SIP stands for the Systematic Investment Plan, is a smart way of investing in the Mutual Fund. With systematic investment plans, the investor gets a chance to purchase units as per the decided date that is given every month so as to go ahead with a certain investment plan.

Systematic Investment Plan

SIP – Advantages to the Investors

  • Investor Can Start With A Small Amount: One can start putting his/her money into Mutual Funds with just INR 1000, via SIP, which does not cause huge burden.
  • Periodic Remittance: As per the nature of SIP and its functioning, it requires the amount to be payable on a periodic basis say monthly and thus, helps the investor to plan his/her monthly expenditure.
  • Auto Debit Facility: Once the investor is enrolled with the AMC (Asset Management Company) to invest in the SIP, he/she associates his/her bank account with the same and the amount of investment is debited from there accordingly, in a hassle-free manner.
  • The Power of Compounding: When we make an investment, we receive the interest on the invested amount on some specific rate. It may be either (1) a simple interest rate or (2) a compound interest rate. In Systematic Investment Plan, investors fetch the return on the compound basis. For example, you invest INR 10000 @ 10% simple interest for 5 years. At the maturity date, you will receive an amount equal to INR 15000 (10000 Invested amount + 5000 Interest). While, in the case of compounded interest rate, the maturity amount will be INR 16105 (10000 Invested amount + 6105 Interest). Accordingly, Systematic Investment Plan is more beneficial to the investor.
  • Rupee-Cost Averaging: Every scheme under the Systematic Investment Plan has a NAV (Net Asset Value), which is basically the unit price of that scheme, on the basis of which the units are allotted to the investor. Lower NAV means more units and vice versa. As the NAV of the scheme changing on a daily basis, every time the money of the investor is put into the plan, he/she gets a different number of units every time. Thus, the average cost of investment reduces. Hence, the investment in SIP is low-cost in comparison with others.

SIP – Also Provides the Following Benefits

  • Convenience
  • Diversification
  • Flexibility
  • Tax Savings
  • Wide Selection

Systematic Investment Plan

How SIP Benefit As Compared To One Time Lump-Sum Investment

  • Let’s take an example of 6 months SIP investment only. Investor one invests INR 6,000 in a single/lump-sum investment at NAV value of 10 (600 Units), while investor two invests in SIP of INR 1,000 every month, where he gets a different value of NAV (such as 10, 11, 9, 8, 8, 11) every month. So the investor two will get average NAV (10 + 11 + 9 + 8 + 8 + 11)/6 = 9.5 (631.579 Units).
  • Now at the end of the six months, both investors redeem their money at NAV of 11. In this case, Investor one will get INR 6600, while investor two will get 6947 (347 more than investor one).

Above example is only for 6 months SIP investment, while for a longer period of investment says 15 or 20 years, the return will be huge as compared to the lump sum investment. This is the power of SIP.

If you are really interested into investments via Mutual Funds you can think about systematic investment plans. With such an investment you can manage your investment amount rather than be caught up with the ups and downs in the markets.

 


Disclaimer: The contents and data presented here are just for your information & personal use only. While much effort is made to provide the information, I ( Vishal Dalwadi ) or “Fin Blab” do not guarantee the accuracy, correctness, completeness or reliability of any information or data displayed herein and shall not be held responsible.


 

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About me

Vishal Dalwadi

Vishal Dalwadi

Vishal is an MBA (Finance) post-graduate. He is the founder and owner of "FinBlab". His blog aims at providing information and research on Stock market and sectors including Mutual funds, IPOs, Insurance and more.

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