What is SIP?

 

What is SIP?

We all have one common desire, i.e., 'to become financially strong.' But only thinking about it will not fulfil it; we will have to work hard for achieving the same. So, before moving towards it, we need to know what can help us to reach there, so as to make the path easier. Everyone is aware that only money has the power of creating monies. Hence, the savings that we owe are the sources of reaching the financial goals and SIP is the route for the same.

What is SIP?

The SIP, which stands for the Systematic Investment Plan, is a way of investing in the mutual fund schemes. Under this, one is required to put the amount of money at regular intervals which is automatically debited from the bank accounts and put into various investment schemes. It possesses a bundle of benefits, and provides the following advantages to an investor:

Small Amount of Payment: One can start putting his money into diversified projects with just Rs. 500 or Rs. 1000, via SIP, which does not cause burden.

Periodic Remittance: As per the nature of SIP and its functioning, it requires the amount to be payable on a recurrent basis say monthly and thus, helps the investor to plan his per month expenditure accordingly.

Debits the Money Automatically: Once the investor is enrolled with the AMC to invest in the SIP, s(he) associates his/her bank account with the same and the amount of investment money is debited from there accordingly in a hassle-free manner.

The Power of Compounding: In investment, we receive the interest on some specific rate. It may be a simple or a compound interest rate. In SIP, investments fetch the return on the compound basis. According to which, the interest earned on the principle amount also realises yield, i.e., 'interest on interest'. For example, you invest Rs. 20000 @ 10% simple interest for 5 years. At the date of maturity, you will receive an amount equal to Rs. 30000. While, in the case of compound interest, the value of the investment on the due date shall be, Rs. 32210.20. Accordingly, it is more beneficial for the investor.

Rupee-Cost Averaging: Every scheme under the SIP has a net asset value(NAV), which is basically the unit price of that scheme, on the basis of which the units are allotted to the investor. Lower NAV means more units and vice versa. As it keeps changing regularly, every time the money of the investor is put into the plan, s(he) gets a different number of units. Thus, the average cost of investment reduces. Hence, the investment in SIP is low-cost in comparison with others.

Apart from the above major benefits, SIP also provides the following:

Flexibility

Convenience

Tax Savings

Diversification

Wide Selection

Accordingly, if one is desirous of achieving the financial growth and experience the riches, the SIP(Systematic Investment Plan) is one of the best choices to make. It is capable of fulfilling every investor's requirement and is beneficial for all.

In the study of economics, we come to know about the power of savings and its relationship with the investments. For the growth of the economy of a country, investment plays a crucial role which leads to the overall development of its citizens. Hence, we can conclude here that by investing our savings in the SIP mutual fund schemes, we can achieve our objective of experiencing the financial freedom.

The author is a financial consultant and is well versed with the concepts of SIP investment plans and mutual fund like Kotak mutual fund, SBI mutual fund, Axis mutual fund, etc and has helped many investors in the past by providing consultancy services.

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