The Great Albert Einstein once said, “The Compound interest is the eighth wonder of the world. He who understands it … earns it, he who doesn’t ….. Pays it.”
Investment through SIP or Systematic Investment Plan can do wonders through the Power of Compounding.
It is an investment mechanism through which you can create wealth over the long term. Like drops of water make an ocean, an SIP can also help you build long-term wealth without bothering about the market’s ups and downs. It allows investing a fixed amount (as small as 500/-) on regular intervals like weekly, monthly, quarterly, or even annually.
Is Investing In SIP a Good Idea?
In a SIP, a fixed amount of money is debited from the investor’s bank account periodically and invested in a specified Mutual Fund Scheme. Every time a sum is invested, units are added to the investor’s account according to the applicable NAV.
It would be best if you linked your Short Term or Long Term goal before going for an investment. A person may have different financial goals– like buying a car, owning a house, a child’s education, a dream holiday, a retirement corpus, etc. A single SIP may not be sufficient to achieve all your goals. Depending on the number of financial goals, you may have to invest in multiple SIPs to accomplish each of these goals.
There are different types of mutual fund schemes. Equity and Hybrid schemes for Long term appreciation, Debt schemes for regular income, and Liquid funds for short-term risk-free parking. Depending on risk appetite, return expectation, tenure in hand, and the goal to achieve, you have to choose between equities, Hybrid, or Debt/Liquid Funds.
A SIP allows the benefit of Rupee Cost averaging in the long term. The longer you invest through SIPs, the better your chances to earn higher returns. Sometimes a particular scheme may not perform as expected due to the wrong selection of funds or unfavorable market conditions. Hence, periodic performance review of the SIP scheme you have invested in is a good practice. You may have to change the scheme in case of prolonged underperformance.
Types of SIP
There are different types of SIPs you can choose from according to your goal and risk appetite.
- Fixed SIP – Fix an amount, date, and tenure till which you wish to contribute, and the rest of the process is automated.
- Top Up SIP – While choosing a scheme for SIP, you must factor in the existing and future inflation. Considering the goal and factoring in the corpus you need, you may have to top up the SIP amount. Increase the SIP amount periodically with the increase of your income every year. The procedure will help you to take care of your inflation-adjusted goal and long-term wealth creation.
- Perpetual SIP – We can also define SIP as “Sleep in Peace.” Perpetual SIPs are just fixed SIP without any fixed tenure. Your bank account will be debited with the amount of SIP contributions till you instruct the fund house to stop the same.
Irrespective of the nature of SIPs, you can stop, pause or redeem your SIPs at any time.
Currently, Mutual Funds have about 5.72 crore SIP accounts through which Monthly inflows are coming into the Capital market to the tune of more than 12,000/- Crore. The total SIP Asset under Management has climbed to 6.4 lakh crore as of 31st August 2022.
It is an excellent way for people to make savings a habit – especially for millennials and GenZ, who find saving difficult.
START A FRESH SIP DURING THIS DIWALI
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– Suman Dan