A Systematic Investment Plan, also known as a SIP, allows you to invest a fixed amount of money on a pre-determined basis. The money, which is withdrawn directly from your bank account, is typically invested in a mutual fund of your choice at an interval that best suits you, like weekly, monthly or quarterly, for example. SIPs allow you to invest in a disciplined way, and there are numerous other benefits. In today’s article, we will discuss how they work and they key benefits, amongst other things.

Understanding Systematic Investment Plans

SIPs are an easy and convenient way to save and invest. Based on your personal budget and financial goals, you first determine how much you can afford to save on a regular basis. SIPs are very convenient in that you have the flexibility of automatically withdrawing from your bank account on a pre-determined basis. Rather than having to write a cheque or remember to move funds around, SIPs provide the convenience of doing this for you automatically upon setting up the SIP with your bank or mutual fund company. The fixed amount of money may vary by bank or mutual fund company but can be as low as Rs. 500. SIPs are also very convenient because you can decrease or increase the amount you invest, as necessary, or even easily stop investing if you need to.

Once you decide the frequency and amount with which you would like the money moved from your bank account to your chosen mutual fund company, that money is automatically invested in the mutual fund that you select to meet your risk tolerance, time horizon and asset allocation needs. Based on the net asset value (NAV) of the mutual fund for that day, you purchase a certain number of units each time you invest. For example, if you invest Rs. 500 weekly, and the NAV of the mutual fund is Rs. 25 in week 1, you would purchase 20 units of the mutual fund that week. However, based on prevailing market conditions, the NAV of the mutual fund may be Rs. 20 in week 2, for example, thus enabling you to purchase 25 units that week. Or, conversely, the NAV maybe Rs. 30 in week 3, thus enabling you to buy only 16.67 units that week. Every time you invest, additional units are added to your account based on the NAV for that day. These units accumulate and grow over time, thus enabling you to increase your savings and achieve your goals.

Key Benefits of SIPs

Power of Compounding

When you invest regularly and stay invested for the long term, you can benefit from the power of compounding. As you know, money you save earns interest, whether it is in savings, equities, or mutual funds. When you save, you earn interest on the money you originally saved plus on the interest you've accumulated. Compound interest is important because it causes your wealth to grow faster.

One of the key success factors of benefiting from compounding is that time matters, and you need to be invested for the longer term. So not only do you benefit from the power of compounding, but you also help reduce your risk by staying invested through multiple market cycles.

Benefit from Rupee Cost Averaging

Rupee cost averaging is a simple investment strategy that entails investing a fixed amount of money in the same investment, such as a mutual fund or equity, on a regular basis over time. With this strategy, you don't have to worry about trying to buy low and sell high. After all, we all know how difficult trying to time the market is. Instead, you ignore the price fluctuations of your investment and put the same amount in no matter what. Essentially, you buy more shares when the investment price is down and fewer shares when the price is up.

The averaging term refers to the fact that, over time, you reduce your average cost per share. On the other hand, if you put your money into the market all at once, you might end up buying at the peak. Ultimately, rupee cost averaging helps you decrease the amount you pay while minimizing risk. Other benefits include the enhanced ability to ride out market downturns, prevent bad timing and how it enables more disciplined savings.

There are many benefits to starting a Systematic Investment Plan, including benefiting from the power of compounding and rupee cost averaging, as detailed above. SIPs are convenient and allow you to invest in a simple, disciplined way. By automatically putting a set amount aside over a pre-established period, it can often alleviate the financial burden of a large expenditure in the future. And, just as importantly, your money can grow and often adds up before you know it! The funds can always act as an emergency fund, if necessary. Just remember to stay committed and invested for the long term and to set realistic goals. If you haven’t done so already, talk to your bank, financial advisor or mutual fund company to get started today!