Systematic Investment Plans (SIPs) have simplified investing in mutual funds to a great extent. Apart from the flexibility and convenience, SIP offers many other benefits to an investor. It is a disciplined way to accumulate wealth in the said investment horizon. You may increase the likelihood of financial goal accomplishment via SIPs. Before embarking on the analytical aspect, let’s look at how an SIP works.

How does an SIP work

SIP allows you to invest a pre-decided amount in the preferred MF scheme at specified intervals. You may choose the time period, that is, weekly, monthly, quarterly, etc, as per your preference. In this arrangement, a fixed sum is debited from your savings bank account and invested in the given scheme. Based on the prevailing Net Asset Value (NAV) you will be assigned a specific number of units. With every invested SIP, the fund manager will buy additional fund units. As per the market ups and downs, the number of units bought may differ. In a rising market, when prices of underlying stocks are increasing, you may get lesser units. Similarly, when markets are falling, the same amount of SIP will fetch you relatively more number of units. In this way, your per unit cost of investing will come down. This phenomenon is called rupee cost averaging.

SIPs are being used extensively for wealth creation. On a continued basis, when the returns earned on your SIPs are reinvested, the power of compounding causes money to grow manifolds. This process can be understood with the help of following example.

Suppose at the age of 25, you start a monthly SIP of Rs 5,000 in an equity fund. The annual rate of return is around 12% and you are planning to continue the SIP till the age of 55. After 30 years of investment, you will end up with a corpus of around Rs 1.7 crore. The table shows the wealth accumulation as you reach different stages in life (see table)

Things to consider while doing SIP

On the face, SIP looks pretty simple way of investing. However, you need to observe following precautions to enable its wealth creation aspect:

Don’t terminate your SIPs in the midst of your investment horizon. Sudden pauses and breaks in SIPs hampers the power of compounding. Moreover, it may cause a shortage in the corpus which had to be invested for goal accomplishment. Remember to continue SIPs till the goal is reached.Investors try to time the market and may get driven by the market turbulence. If you are committed to your financial goals, then SIP will help you to stay calm. It takes away the stress of timing the market. You may, thus, develop a long-term perspective and stay invested accordingly.In order to earn higher inflation-beating returns, it is always better to step-up SIPs. Here, you may increase the SIP amount by say 10% every year. This will not only help in placing smaller systematic bets but also not seem a burden.After you have initiated SIPs, it is important to review your portfolio periodically. In this way, you may get rid of underperforming funds and switch to top performers. If you miss on portfolio review, you may as well miss on goal accomplishment in the desired manner.

Courtesy by : Daily Hunt