SIP or Systematic Investment Plan is an investment method in mutual funds which has been the talk of the town off-late. Almost every household knows about mutual funds, ‘Mutual Fund Sahi Hai’ campaign and the systematic investment plan.
In December 2018, there were about 2.54 crore active SIP accounts with a total collection of about 8022 crores as per AMFI- Association of Mutual funds in India, which is quite high a number.
SIPs are a way of investment which can be compared to recurring deposits in banks. You deposit a fixed amount of money after fixed intervals in a recurring deposit, similarly, in case of SIP you deposit a pre-fixed amount of money in your portfolio after fixed intervals. The key difference here is that in the case of bank RD the money is safe and comes with assured returns whereas, in case of mutual funds, the money is subjected to the market fluctuations and hence risks.
Consider SIP as your childhood piggy bank where you used to add money from your pocket money. And as and when the time passed, you realized that every penny you collected added to a large corpus which was then used to buy your favorite bicycle or video game, etc.
Similarly SIPs create regularity in investment style and helps in the creation of wealth in the long term. The investment amount is automatically debited from your linked account on a specific date either weekly or monthly or quarterly or yearly, as per your instructions. To know more about SIP, read https://www.piggy.co.in/blog/what-is-a-sip/
How safe are SIPs?
It would be totally justified to measure SIPs in terms of safety. They are a way of investment and not a folio to check for safety. The money you invest through SIPs goes to the stock market and a combination of bonds and stocks. These funds are dependent on the market hence face the volatility as well. Therefore, the money you invest via SIPs is not market-risk protected.
Also, the equity mutual funds have more fluctuating NAV, hence SIPs are more effective with Equity funds.
WHY SIPS ARE NOT CONSIDERED SAFE?
Since the market’s basic nature is volatile, all the investments dependent on market movement are highly vulnerable be it SIP or lump sum. But the point to be noted here that, when everything else fails, SIPs may come out shining brightly. SIPs work as shock-absorbents for investors. For minor ups and downs, the rupee cost averaging feature keeps its flags high and averages out the risk in the long run.
ADVANTAGES OF INVESTING IN SIP
1. Start small
2. No need to time the market
3. Rupee cost averaging
4. Power of compounding, read https://www.piggy.co.in/blog/power-of-compounding/
5. Gets aligned with financial goals
It is very important to choose your funds. The mode of investing comes next, it is the selection of mutual funds that is more responsible for the growth or downfall of your money. If you are planning to stay invested for a considerably longer period, go for SIPs. They two main features of this method work in great favor of yours- rupee cost averaging and the power of compounding. The risks are averaged out, the gains are compounded making the maturity amount quite high.
Another thing that needs to be kept in mind is that short term aberrations should not affect you strongly. A Bear is always followed by Bull and vice-versa, hence make the best out of what you have at hand.
While you invest with SIP make sure the tenure is minimum five years to reap the best out of it. Even if the markets fall or rise, keep that SIP going.