What are the benefits of Systematic Investment Plan (SIP)?
The best way to earn returns is to buy cheap and sell when the price increases. However, for an average investor, timing the market may be a difficult proposition. Seasoned investors who spend a huge amount of time in study and research are also unable to time the market. In such a situation, it is a nearly impossible task for you.
It is not always possible to time the market when you invest either in stocks or in mutual funds. One way to overcome this limitation is to invest in mutual funds with systematic investment plans. Such a plan has an automatic inbuilt mechanism to accumulate more or fewer units based on the market conditions.
What are the benefits of SIP?
To maximize mutual fund returns, systematic plans are the most efficient method of investing. You do not need to consider daily market movements to invest your money in these plans. It is recommended that even if you invest regularly, you must opt for SIPs as your primary investment strategy.
Here are four advantages of SIP:
- It brings about financial discipline
- It is pocket-friendly
- It provides compounding effect
- It reduces risk because of rupee cost averaging
Let us understand each one of these in detail:
One of the most important factors to ensure you are able to meet your long-term investment goals is financial discipline. When you invest in a systematic plan, a fixed amount is debited from your bank account on a specific date for a fixed amount. Your investment does not depend on your ability and willingness. Additionally, when there is a market correction, you may be tempted to discontinue your investment. However, SIP ensures the investment does not stop even if the markets fall, which is crucial to meet your long-term financial goals.
It is not always possible for you to invest large lump sum amounts. However, a systematic plan may be started with as little as INR 500 per installment. Furthermore, you may choose weekly, monthly, quarterly, or annual installments as per your financial situation. A low investment amount ensures regular and disciplined saving even when you do not have a large investible surplus. Therefore, investing in SIP plans ensures you do not face any financial difficulties.
When you remain invested for the long-term, you are able to accumulate a higher corpus because of the power of compounding. This means that your mutual fund returns are reinvested in the same scheme to accumulate more units. Therefore, your dividends are able to earn further income through the compounding effect. To maximize the power of compounding, it is recommended you start investing early so your investments have several years to grow.
Rupee cost averaging
The biggest benefit of systematic investment plans is the rupee cost averaging. In simple terms, it means that when the NAV is high, your installment amount is able to acquire lesser units. Similarly, if the NAV is low, the installment amount is able to accumulate more units. Therefore, the average cost of your total holdings reduces as the number of installments increase. As a result, you are able to earn higher profits on your total principal amount at the time of exit giving you an increased SIP rate of return.
What are Systematic Transfer Plan (STP)?
If you want to invest a lump sum, you may not want to risk your entire amount to high market volatility. In this case, a Systematic Transfer Plan (STP) is beneficial. When you start an STP, a pre-determined amount is invested in another scheme offered by the same asset management company (AMC). For example, you may invest your principal in a liquid fund and then transfer a specific amount each month to an equity fund. This strategy allows you to earn a higher SIP rate of return.
You may invest in several mutual fund schemes. You may have neither the knowledge nor the expertise to choose the best schemes amongst the available options. ARQ, our proprietary investment engine gives you customized investment recommendations to maximize your returns. As a key highlight of our Angel Bee mobile application, it uses the scientific and automated procedure to analyze different mutual fund schemes to match these with your financial goals and risk profile. The automated investment engine ensures there is no human intervention eliminating all bias while making the recommendations.