What is a Systematic Investment Plan (SIP)?

Why Systematic investment plans?

Systematic Investment Plans or SIP allows one to invest a pre-determined amount on a monthly or quarterly basis for a fixed period of time. Therefore, you need not invest a lump sum amount at once. This helps in making smart savings and also reduces the chances for being adversely affected by the fluctuations of the market. What is a Systematic Investment Plan? How does it work?

Investing small amounts instead of lump sum from an early phase of life is a good experience as it will help you experience and understand the power of compounding through all the years of investment. This initial small amount can be gradually increased with your increasing income levels.

Let us consider an example where you commit to invest one thousand rupees for one year. For this, you would give your bank standing instructions to make payments of the desired funds via Electronic Clearing Services or ECS to the mutual fund company every month on a particular date. According to the current Net Asset Value (NAV) you will be allocated by number of units. This NAV of the fund may change every month. Sometimes it could be repeated or may change by amounts like 10 rupees, 9.25 rupees, 11.30 rupees and so on. Therefore, you would have to take an average of your investment price in the fund at the end of that one year. Instead of investing one thousand rupees, you can also start with a smaller amount of five hundred rupees per month to experience compounding and you will be able to change this amount of investment by changing your bank instructions.

The word ‘Compounding’ means to generate earnings from previous earnings. By making investments, even with smaller amounts, you will receive interest on your original amount as well as on any interest dividends and capital gains that accumulate with time. This will help in making your money grow faster throughout the years making it easier for you to meet your financial goals.

THINGS TO REMEMBER

Investing through Systematic Investment Plans you will be able to invest regularly, minimizing risk of investments, making it one of the best methods for effective investments.

In order to achieve your ‘big money’ goals, you may remember the following key points –

1. Invest in the earliest stage of life.
2. Invest regularly.
3. Begin by investing small amounts.

” Before investing into any kind of mutual fund, you should remember that; Mutual fund investments are a subject to market risk. Read the offered scheme related documents and information carefully before investing.”

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