• HDFC
• 04 Apr 2018
• Systematic investment plan SIP

HDFC, Tester

Quench your thirst SIP by SIP: The best way to build an investment

 

Systematic Investment Plan or SIP is one tool that has transformed how people invest. It has allowed people to build a large corpus of money by investing small amounts regularly. It has helped investors reduce the risk of fluctuating prices while achieving better returns than safer fixed-income investments.

 

What are SIPs and what are the benefits for investors?

 

Systematic Investment Plans were first introduced by Franklin Templeton nearly 25 years ago. In a SIP, you put a fixed amount of money every week, month or quarter in a mutual fund scheme of your choice, much like you would in a recurring deposit. Investors are free to stop their SIPs when they want. They can even liquidate their holding whenever they need the funds (except if they have invested in schemes that have a lock-in period).

 

Why SIPs are the best way to invest?

 

The keys to good investments are regularity and discipline. We give you five reasons why SIPs are ideal for all kinds of investors.

1. Encourages discipline: Even our grandmothers praised the virtues of saving regularly. SIPs, in a way, force you to invest a small amount every month. Today, SIP investing is completely paperless and automated, so you don’t even have to remember to invest. You SIP amount is automatically debited from your bank account and invested in the scheme of your choice. If you are salaried, pick a date in the first half of the month to service your SIPs.

2. Reduces risk: The reason why SIPs are so successful is that they are designed to minimize the risk of volatility. SIPs use the power of rupee cost averaging. What this means is that you accumulate more units at a lower price and fewer units at a higher price. This in turn helps you to average out per unit cost of your investment.

 

Let’s look at an example. You invest a sum of Rs 3000 monthly in an equity mutual fund.

 

• In the first month, the price of the fund is Rs 100. So, you get 30 units
• In the second month, the price falls to Rs 75, and you receive 40 units
• In the third month, the price rises to Rs 150. You get only 20 units
• You have now accumulated 90 units for Rs 9000. Your average cost per unit is still only Rs 100.

 

Imagine an investor entering the market with a lump sum investment of Rs 9000 in the third month. That investor is carrying a higher risk than you. Only an investor who enters in the second month, when the price is at its lowest, will earn better returns than you. This brings us to the next benefit of SIPs.

3. No need to time the market: SIPs allow you to overlook short-term volatility and invest with confidence without worrying about whether it is the right time to invest. Since you are committing only small amounts every month, you are limiting your exposure. If the markets fall, your next SIP will fetch you more units. On the other hand, if you are investing a lump sum, it becomes important for you to time the market.

4. Allows to start small: The idea of SIP is to allow investors to make small contributions regularly that can grow into something substantial over time. You can invest as little as Rs 500 a month in most mutual funds.

5. Helps you achieve your financial goals: No matter what your financial goal – children’s education, home, early retirement, car, international holiday – you can use the SIP route to plan and achieve it over time. Use our SIP Returns Calculator to know exactly how much your monthly investments can grow across different mutual funds and make a better plan for the future.