SIP is the short form for Systematic Investment Plan. It is a way to invest small amount of savings on a regular basis.
SIP is similar to a bank RD, here it is invested into a Mutual Fund. Where you can pre-fix the amount you want to invest on a regular basis. It can be monthly, Bi-monthly or quarterly.
The difference between Bank RD & Mutual Fund SIP is, in RD, every rupee invested will be growing every day. It has a fixed growth in a fixed period. In an SIP, the investment will not be growing every day. Some days it can be up and some it can be negative. It has no fixed return though it can have a fixed period.
This up & down movement is what makes SIP’s more attractive, because it will give lesser number of units when markets are up and more units when it is down. It will help in averaging the investment so that, when the market goes up to its next higher level, your investment brings higher return.
Let’s look at this with an example:
Investing ₹1000 into an RD account which gives 7% interest will accumulate to ₹12465 after 12 months. The same amount invested in a MF SIP where the assumed return is 7% and the funds NAV goes down to -7.60% in the same year before closing with a 7% profit. The value of the investment will be ₹12765. 300 additional earnings which is 30% more than bank RD.
This is the advantage of an SIP in mutual Fund. And Mutual Funds generally give 15% returns which would mean the same 1000 investment for 12 months would have grown to 13670. A profit of 1670 against only 465 from the banks.
Why you should start an SIP?
The first reason is that it brings a discipline to save. And the second, the most important reason is that, it keeps you off mood swings. For example – If you decide to invest an amount every month taking time to check the market and then do it. Most of the time, you obviously get held up in some task and miss the investment. If you have the time, you would want to wait for a better price. Or think about your previous investment which is now in the negative and postpone the current one.
SIP removes all these worries about timing. It helps you have the investment happen automatic & accumulate wealth.
Axis mutual Fund has coined a tag line for SIP, Sleep In Peace. It is really so peaceful was of accumulating wealth.