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Friday, January 11, 2019

SIP - What is Systematic Investment Plan (SIP)?

SIP regularly works on the principle of investment. It's like your recurring deposit in which you put a few small amount of money every month.

Instead of investing heavily in a single time, mutual funds give you the freedom to invest in a short period (monthly or quarterly). SIP lets you invest 10 rupees in 500 rupees instead of investing 5,000 rupees in one mutual fund.


This allows you to invest in mutual funds without affecting your other financial responsibilities. To understand better how SIP works, you need to understand the rupee cost averaging and power of compounding.


SIP has brought mutual fund investments within reach of an average man, because it allows those tight budgets to invest in people who can invest 500 or 1,000 rupees instead of making large investments at a time.


Small savings through SIP may not be attractive for the first time, but it puts investors in the habit of saving and in the coming years they give you beautiful returns. A SIP of 1,000 rupees per month can increase from 9% to Rs 6.69 lakh in 10 years, Rs. 17.38 lakh in 30 years and 44.20 lakh in 40 years.


Not only does this save the poor people from the danger of investing in the wrong time and the wrong place. However the real advantage of SIP comes from investing at the lower level.


Other benefits of SIP include:


1.United investment-


The main rules for keeping your funds safe are: invest continuously, focus on your investments, and maintain discipline in your investment manner. Removing a few amount every month will not make much difference on your monthly income. It is also better for you to withdraw large amounts of money collected for investment, save a few bucks every month.


2. Power of Compunding


Investment gurus suggest that one person should always start investing quickly, one of the main reasons is the benefit of getting compound interest. Let's learn this from an example. Prasoon (A) starts saving 1,000 rupees every year from the age of 30, while the same person (B) also saves the same money but from the age of 35 years. When both get their money invested at the age of 60, (A) fund is 12.23 lakh and (B) only 7.89 lakh. In the example we can consider returning at a rate of 8%. So it is clear that the difference of investment of Rs 50,000 initially has an impact of more than 4 lakh on the last fund. This is due to the power of compounding. The longer the time you invest, the more you get the return.


Now suppose that (a) instead of investing 10,000 every year, 50,000 is invested every 5 years after the age of 35. In this situation, the money invested in it will remain the same (which is 3 lakh) but it is 60 years old A fund of 10.43 lakh gets (fund). It shows that even after putting equal money in investing late, the person loses the benefit of the compound interest that is initially received.


3. Value of Rupee (Rupee Cost Averaging)


This is primarily useful for investing in shares. When you invest similar funds at a constant interval in a fund, you buy more units of the stock at a lower price of rupee. Thus, the average cost per share or (per unit) decreases over time. This is the average cost policy of rupees which has been made for a long term sensible investment. This feature reduces the risk of investment in the volatile market, and the ups and downs of the market keep you comfortable in the uplifted journey.


People who invest through SIP can handle the time of market downfall as well as the time of market upturn. The average cost of your investment by SIP is low, even when you go through all sorts of times in the market or below the market.


4. Convenient


This is a very easy way of investing. You will only need to deposit the check with the filled filled enrollment form, which will be deposited in the mutual fund on the date you said and the share units will come in your account.


5. Other Benefits ---


• There is no tax or fee for putting or withdrawing money in SIP investments.


• Taxes on capital gains in this case (wherever applicable) depend on the time of investment.

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