Systematic Investment Plan or SIP as it is commonly referred to as the mutual fund industry is a free and simple tool to save and invest fixed sums regularly in a mutual fund scheme. There is a mix-up among a large number of mutual fund investors who believe SIP to be a type of a mutual fund scheme. However, SIP is a mere tool to invest in mutual funds and not an investment scheme in itself. Through SIP, one can save and invest fixed sums periodically. Let us understand how SIP can help an investor in the long term.
Mutual funds are an investment vehicle for pooling financial resources from investors sharing common investment objectives. The Asset Management Company running a mutual fund collects money from investors sharing a common investment objective invests the money depending on the mutual fund scheme’s nature and its investment objective. Mutual fund investors receive units based on the money that they invest and depending on the fund’s current Net Asset Value (NAV). For example, if the current NAV of a large-cap fund that you invested in is Rs. 10 and if you made an investment of Rs. 10,000 you will be allotted 1000 units.
However, if you have a long term investment horizon, it is better to invest in mutual funds via SIP. Here’s how investors can benefit from SIP investing:
Rupee cost averaging
Many of you may not be aware but it is possible to leverage the volatile markets from SIP. Since the SIP sum remains stagnant, investors can buy more units when the NAV is low and fewer units with the same amount when the NAV is high. Since the market fluctuates from time to time, investors may be able to buy more units in the long term, thus averaging out their total cost of purchase. This is referred to as rupee cost averaging.
Power of compounding
Several investors underestimate SIP investments are they feel that they will never be able to achieve a large corpus through small monthly SIP investments. However, they do not know that if they continue investing in mutual funds via SIP for the long run, they will be able to witness the compounding effect. When the principal amount that you invested in a mutual fund scheme earns interest and when this interest is reinvested and starts earning interest of its own, compounding is known to come into effect.
Mutual fund investors can invest in mutual funds via SIP at their convenience. Since there is no upper limit, an investor can invest any amount as per their investment objective and risk appetite. They can invest this sum regularly till their investment objective is attained. The same investor can even modify the monthly SIP sum, skip a month’s SIP or stop their SIP investments midway. Investors do not have to pay any cancellation fees for stopping their SIPs midway.
Use the SIP calculator
Investors who start their SIP investment journey must be keen to determining how much corpus they will be able to accumulate in the long term. Such investors can use an online SIP calculator, a free tool that is easily accessible to everyone. All an investor has to do is fill in some simple details like the total sum that they want to achieve, enter the number of years that they have in hand before they achieve that corpus, and also input the rate of returns they expect the mutual fund to deliver. Within a few seconds, the SIP calculator will display the SIP sum that they need to invest regularly in order to achieve the desired corpus.