What is systematic investment plan? |
Posted: August 22, 2017 |
What is systematic investment plan? Systematic investment plan is also known as SIP and is a smart and hassle free means of investing in mutual funds. With SIP you are able to invest a particular pre-determined amount at regular intervals like weekly, monthly, quarterly and more. With SIP you can plan your approach towards investment and this in turn helps in inculcating the habit of saving and building wealth for future use. How does SIP work? SIP is flexible and easy to invest in where your money is auto debited from your bank account and then invested in a particular mutual fund scheme. Certain number of units is allocated to you based on the ongoing market rate which is known as NAV or net asset value for the day. Every time an investment is made, additional units of the scheme are purchased at the market rate and added to your account. Therefore, units are bought at different rates and the benefit that the investors get is from Rupee cost averaging and the power of compounding. Rupee cost averaging As the markets are volatile, hence most investors are usually skeptical about which is the best time to invest and they try to time their entry into the market. However, you can get out of the guessing game with the help of Rupee-Cost averaging. Due to the fact that you are a regular investor, your money will gain more units when the price is low and lesser units when the price is high. Hence you will get a lower average cost per unit during volatile periods. Power of compounding If you wish to understand the rule of compounding then you need to bear in mind that the sooner you invest, the more time your money will get to grow. Hence it is advisable to invest at a younger age, if you want to enjoy maximum benefits during the later years of your life. This is a great way of investing because your money will grow enough to take care of all your requirements in your old age. Other benefits of Systematic investment plans Disciplined savings – Like everything else, the key to successful investment is discipline. This is especially true for people who have a fixed monthly income and need to save from out of this after taking care of all their expenses. When you opt for SIP, you make a commitment to saving money on a regular basis. Every single investment you make will take you close to your financial objective. Flexibility – Although systematic investment plans are ideal for long term investment and it is advisable to invest in them in the long run, but this is not a compulsion. In fact, you can discontinue the plan at any time. You can also increase or decrease the amount being invested. Long-term gains – It is possible to get attractive returns over a long term investment, due to the rupee-cost averaging and the power of compounding in SIP. Convenience – Systematic investment plan is a hassle free means of investment because the money towards the regular periodic investment is auto debited from your account. You can issue standing instructions to your bank in order to make these auto deductions when required. All in all, systematic investment plan or SIP is a great investment option for long term investments although you can stop the investment at any time that you wish. At the same time, it is also a great option for people who have a fixed monthly income. Unlike bank fixed deposits or stocks and shares you are not required to invest a large amount at a single time. In fact, you can build your investment and yet benefit from the market scenario by making smaller investments at regular intervals.
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