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What Does SIP Mean And What Are Its Benefits?

Updated On Sep 30, 2021

One of the most convenient ways to invest in mutual funds is a Systematic Investment Plan (SIP). It allows you to start your financial journey with a minimal quantity of money. SIP investing in mutual funds can help you reach your objectives while also instilling financial discipline. It allows you to invest a predetermined amount of money on a regular basis, such as monthly, quarterly, semi-annually, or annually. Let us now look at the working and advantages of SIP investment.

How Does a SIP Work?

When you engage in a SIP, you invest a set amount of money over a set period of time. You can buy a set number of fund units with this amount. If you do this for a long period, you will be able to invest in the fund at both highs and lows. To put it another way, you don't have to time the market to make money. Market timing can be dangerous since one can make a mistake and invest at the wrong time. This element of unpredictability is removed with SIP investments. You can select to automate your investments once you've determined the investment term and frequency. Give your bank a standing instruction to transfer money from your bank account to the mutual fund SIP of your choosing on a regular basis (monthly, quarterly, etc.).

What Are the Advantages of Systematic Investment Plans (SIP)?

Here is the list of benefits of making an investment through a systematic investment plan. 

  • Ease of Investing

SIP is one of the most simple and easy ways to invest. A Systematic Investment Plan is excellent for you if you are unfamiliar with the financial market and how it operates. All you have to do now is choose a good fund and give your bank standing instructions to manage your SIP investment.

  • Budget-Friendly

SIP is a great option for folks who don't want to invest in mutual funds all at once. You can start with an investment as little as Rs. 500 each month with a SIP. It's a cost-effective approach to invest your money without putting a strain on your pockets. As a result, SIP is appropriate for investors of all financial levels. People who do not have a steady source of income might also benefit from this type of investing. A small investment made at regular intervals ensures that you will save a portion of your income. 

  • Power of Compounding Effect

The most major benefit of investing in mutual funds is the ability to build a larger corpus through the power of compounding. You reinvest your profits in the same scheme when you invest in mutual funds through a systematic investment plan. As a result of the compounding effect, your dividends might earn you additional money. To get the most out of compounding, you must start investing early and stick with it for a long time. 

  • Protection Against the Risks of Financial Market Volatility

SIP shields investors against the financial markets' volatility. It protects investors from speculative decisions and hasty actions. When the markets are volatile and falling, you can buy more mutual fund units at a lower price. As a result, SIP protects investors from speculation while also allowing them to purchase more units at lower prices.

  • Rupee Cost Averaging

Rupee cost averaging is a benefit of the Systematic Investment Plan. In layman's terms, rupee cost averaging means that your SIP investment will buy fewer mutual fund units when the NAV is greater. When the NAV is lower, the same SIP instalment will purchase more mutual funds. As a result, you'll be able to average out the cost of mutual fund units over the course of your investment. 

  • Emergency Fund

When you invest in open-ended funds, you can take your SIP money out whenever you want. This flexible withdrawal feature might assist you in meeting your financial obligations in an emergency. 

  • Inculcates Discipline

Investors that use a systematic investment plan (SIP) are thought to be more disciplined. When you invest in a SIP, a set amount of money is deducted from your bank account at regular intervals. Your investment is not based on your willingness or other considerations in this case. SIP investments ensure that you save and invest money on a regular basis to achieve your financial goals.

Endnotes

The market is full of numerous mutual fund schemes. All you have to do is choose the fund that best suits your needs. If you lack sufficient knowledge of the financial markets, you can take the services of professionals and invest in mutual funds plans that are tailored to your long-term objectives.

Also read: 

Are Gold Investments Better Than SIPs?    

SIP or FD: Which Is the Better Option?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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