By Arina Smith
The rapid growth in the Indian economy has seen tremendous improvement in the lifestyle of the average Indian. Today, Indians are not only living a better life thanks to the increase in the National Income, but it has also seen a rise in the purchasing power of the countrymen, owing to an increased per capita income. Apart from the rise of purchasing power, another effect of the increased per capita income can be seen in the increase in savings of the average Indian, after payment of the expenses. This is an indication that more Indians are in a position to invest their hard-earned money today, than perhaps ever before.
Mutual funds in India has provided its citizens with an ideal platform to invest their money and get attractive returns. However, lump-sum investment in mutual funds still remains out of the reach of a majority of the Indians. Under such circumstances, the most viable option for most is the Systematic Investment Plans or SIPs. Let us discuss more the various aspects related to the Systematic Investment Plans.
What is a Systematic Investment Plan (SIP)?
The concept of investing in a Systematic Investment Plan is similar to investing money in a Recurring Deposit with a bank. In this type of investment, the investor is required to invest in mutual funds in a systematic and regular manner. However, there are differences in investing money in a Recurring Deposit and a Systematic Investment Plan. In case of a SIP, the money will be invested in mutual funds, as opposed to a bank deposit. Hence, in this case, the returns may be more generous than in the case of the bank, but at the same time, the money invested will also be subject to market risk.
The concept of SIP has widely been hailed as a good practice because it has the potential to infuse a disciplined approach among Indian investors, thus encouraging good savings habits. It is a comparatively simple process of investing, where an investor regularly invests in building wealth over a long period of time. Another major feature of the Systematic Investment Plan is its flexibility. The investor has the choice to deposit money on a daily, weekly, monthly, yearly basis and so on, depending on his or her preference. Depending on the frequency, a sum will be deducted from the investor’s account through post-dated cheques or ECS mandate. The money that comes out of the investor’s bank is invested in a scheme chosen by the investor for a specified period of time.
Nowadays, it is possible to invest in Reliance mutual fund, HDFC mutual fund, etc. through SIPs online. The Asset Management Companies, Mutual Funds Houses, etc. have their own platforms through which it is possible to invest online any time of the day. Apart from being much more convenient and time-saving, investing in SIPs online can also help the investor keep track of the investments much more easily than the traditional methods. Hence, technology has impacted this sector too.
Advantages of Investing in SIPs
Since its inception, the Systematic Investment Plans have become popular by the year. It is not just a change in the economic situation that has contributed to its growing popularity. Rather, it has certain crucial advantages over some of the other forms of investments. Let us check out some of the biggest benefits of investing in SIPs –
1. Easier on the Pocket:
The biggest draw for the SIP, when compared to some of its competitors, is that it is easier on the pocket. One does not need to pay a big amount at once to enjoy the benefits of investing in mutual funds. Instead, it is possible to invest as little as Rs. 500 at one go. The investor has the flexibility to choose how much he or she wants to invest and at what interval. As mentioned earlier, it could be weekly, monthly, quarterly, etc. This has obviously broadened the target customer base. In a country like India, it is a major winning point, as many people have surplus income which is not enough to invest in a lump sum.
2. No Hassle of Market Timing:
Market timing is one of the most difficult tasks in the stock market. Even the most experienced of investors fail to time the market on a consistent basis. Systematic Investment Plans takes market timing out of the equation. SIPs focus on ‘time in the market’ than ‘timing the market’ for wealth creation by choosing the best mutual fund investment options available in the market. It has been proven repeatedly that equities more of than not tend to outperform other asset classes like gold, debt or even real estate in the long-term and can be used as an effective tool to counter inflation. However, the reason that equities are not spoken of so highly as the mentioned asset classes are because equities require certain skills. These skills can be picking the right stock or mutual fund or timing the market perfectly.
These issues can, however, be solved through the effective use of SIPs. The investor has to ensure that he or she stays focussed in the long term so that the volatility of the market can be evened out.
3. Rupee Cost Averaging:
Systematic Investment Plans can prove to be a more profitable investment opportunity that the traditional lump sum mutual fund investments. The reason for this is the rupee cost averaging. The rupee cost averaging allows the investor to buy more mutual fund units at low prices and less when the prices are high. This again is a healthy practice as it develops a habit of investing at market lows. This enables the investor to reduce the average cost of investments.
4. Power of Compounding:
Subscription to investment through Systematic Investment Plans means that the investor gets in the habit of investing regularly, which in turn causes the money invested in being compounded. Hence, in the long-term, SIPs have the capability to compound wealth systematically better than lump sum mutual fund investment. Especially it involves market volatility.
5. Long-term Goals:
The equity market is often looked at as an opportunity to make short-term profits. However, SIPs help the investors look at it as an option for achieving long-term financial goals as well. SIPs can, in fact, be used to achieve major goals such as retirement planning, early retirement, marriage, children’s education, etc.
With all these benefits, and ease of investing, Systematic Investment Plans are definitely one of the best investment tools available in the market.
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