“SIP”, (Systematic Investment Plan) A common word which you will encounter at least once in a day. From television advertisements to Newspaper ads or even a hoarding on the roadside, encouraging us to start a SIP today. But being an extra cautious citizen of the country specially in case of investment, the same question strikes me as well that Whether taking this route or I say a sip of Investment for SIP will be beneficial for my financial growth?
To get my answers I started exploring most of the knowledge areas which I came across and made sure that none of the stone is left unturned. So, here’s my take on Mutual Funds SIP:
Let’s understand more about SIP (Systematic Investment Plan) before we begin,
As I understand SIP is basically a fixed amount of investment you make in a mutual fund on a regular basis usually on monthly basis for a specific period to build a decent amount of capital over the time. The good part about this is we can start with as low as Rs. 500 / month. Now the question is what exactly makes it a good option for investing? And the answers are,
- It protects our investments from market fluctuations, so that we can rest assure and get a steady return over a time
- It can be started with lowest amount without affecting our monthly budget, just like a healthy EMI option I would say
- It’s a regular investment component and gives a better steady return than regular fixed deposits
- With the help of compounding, the return expected is much better than the traditional lumpsum investment
I am sure, the last point would be bit confusing for you. Just to simplify the same let’s take help of an example to understand the power of compounding in SIP. So, introducing one of my friend Waseem who invested in a mutual fund through a lumpsum amount say Rs. 5000 and on the other hand one more friend Vinod who took the SIP route in investing in the same mutual fund and paid the same amount in 5 months i.e. Rs. 1000 / month. They both started their investment journey in the month of January, so let’s study their case and understand which route scores well.
|Market Value of Fund / Unit||Waseem||Vinod|
|January||Rs. 10/Unit||Bought 500 Units @ Rs. 5000||Bought 100 Units @ Rs. 1000|
|February||Rs. 12/Unit||–||Bought 83.33 Units @ Rs. 1000|
|March||Rs. 15/Unit||–||Bought 66.67 Units @ Rs. 1000|
|April||Rs. 8/ Unit||–||Bought 125 Units @ Rs. 1000|
|May||Rs. 6/ Unit||–||Bought 166.67 Units @ Rs. 1000|
|Total Units bought||500||541.61|
Based on the above table its clearly seen that Vinod’s method scores well than Waseem’s way of investment. Let’s take a close look at the above case. Waseem bought all 500 Units at once but at the same time Vinod took advantage of the market fluctuation price and invested regularly which made him to buy more units when the markets was not doing well and limited him to buy Units when it was at peak. So, with this strategy at the end of 5 months Vinod accumulated more units, almost I would say 9% more than Waseem who stuck to the traditional investing style. So, this is how compounding works for Vinod with just a tweak in a strategy which can give us far better return without burning a hole in our pockets.
I hope this will give us a clear understanding about SIP and as I say take the right sip for your Investment through SIP, and start looking for a good fund to start with. Probably soon will post about selecting the right mutual fund, till then if you have any feedback, queries or concern then do reach out to me at firstname.lastname@example.org. Have a happy and successful investment life ahead…