How SIP Helps in Achieving Financial Goals

When it comes to investing, today almost every other person opts for a systematic investment plan (SIP). This is largely because over the past decade investors have realised that SIP is the simplest way to create wealth and achieve financial goals in a seamless manner. SIP is a method to invest in mutual funds systematically and take exposure to various asset classes like equity, debt, gold, etc. By setting up SIP, a pre-defined amount gets automatically debited from the investor’s bank account and credited to the investment account. Here, the investor has the flexibility to choose a convenient date and SIP contribution frequency which can be daily, weekly, monthly, or quarterly. 

The amount will be automatically debited from your bank account under the Electronic Clearing System (ECS) mandate on the selected SIP date. Financial goals typically can be segregated as short, medium and long-term goals. For each of the goals on the basis one’s risk appetite an investor can choose between equity mutual funds, Debt Funds and Hybrid Funds. Hybrid funds are those which can invest across different asset classes. Even though equity investments tend to be volatile in the short term, over long term the experience tends to be good. Hence, use equities to meet your medium to long-term goals. For short-term goals, it is advisable to use debt mutual funds or conservative hybrid mutual funds.

How SIP Aids in Achieving Financial Goals

1) No Need to Time the Market — SIP aids in avoiding the most common pitfall faced by investors: timing the market. By investing through SIP, an investor ensures that he/she is investing during the bull, bear and sideways market phases and is not waiting out for a particular market phase to begin or get over. As a result, the outcome of staying invested over a complete market cycle tends to be phenomenal.

2) Benefit from Rupee Cost Averaging — The basic idea behind SIP is that you invest a particular sum of money at regular intervals, irrespective of the invested mutual fund’s net asset value (NAV). NAV is the price of one unit of a mutual fund. As the NAV goes up, your investment value increases and hence the number of units allotted by the fund house goes down. Likewise, if the NAV goes down, your investment value decreases and you receive more units. So, if you are staying invested through a bear market cycle, you will have the benefit of accumulating units at a cheaper cost and as the market recovers you stand to make substantial gains. Hence, it is important to stay invested over the long term. The rupee cost averaging feature of SIP helps achieve financial goals with lesser risk of market volatility and lower cost of investment.

3) Get the Power of Compounding — The SIP route allows investors to harness the power of compounding over a long period. Compounding is the process of generating returns on your money and the returns themselves. So, it is advisable to start investing early and stay invested for the long term to enjoy the benefits of compounding. However, the effects of compounding will not be visible in the portfolio in the short run.

4) Easy on the Pocket — Another significant advantage of SIP is the low minimum investment amount one can start with. You can start investing with just ₹500 per month. In order to make it accessible for the wider masses, today there are schemes which allow an investor to start an SIP with as low as ₹100. So, there's no need to wait until you have saved up a significant sum of money before investing in mutual funds through SIP. 
 

While ₹100 or ₹500 may look insignificant, over a long period your money will compound and holds the potential to surprise you positively. Moreover, you also have the flexibility to increase the SIP amount as and when your cash flow improves. To conclude, while SIP no doubt is a game-changer when it comes to achieving long-term goals, the most critical factor is the discipline in investing, which SIP provides. And in case if you have lump sum money and wish to invest in equities, it is better to divide the amount into smaller chunks and invest through SIPs.
 

The writer is Mutual Fund Distributor ■ Email : tejdhavalins@gmail.com ■ Website : www.tejdhavalfinserve.com