SIP – The winning recipe to build wealth

A systematic investment plan is a popular way to invest in mutual funds. Earlier, mutual fund investors could only invest in these market linked schemes by making a one-time lump sum investment. This lumpsum investment had to be made at the beginning of the investment cycle. If you invest in equity mutual funds through lumpsum investment, you are exposing your entire finances to equity market's volatile nature right from the beginning of the investment cycle. Thanks to the introduction of SIP, investors can now invest small amounts at systematic intervals rather than making one time lump sum investment. SIP is nothing but a way to invest your money in mutual fund schemes. After you decide which mutual fund you want to invest in to achieve your short term and long term financial goals you can invest in that particular scheme via a systematic investment plan. In SIP, once you complete a one-time mandate with your bank in which you hold a savings account every month on a fixed date a predetermined amount is debited from your savings account and electronically transferred to the mutual fund. Not everyone is able to determine the exact amount they need to invest in mutual funds via SIP. If you too are uncertain about how much money you need to invest in order to achieve the desired corpus you can refer to an online SIP calculator.

How can SIP help investors build wealth?

Investments in mutual funds via sip are known for wealth creation over the long term. But how does one achieve long-term capital appreciation by investing in mutual funds by SIP. Here are some of the factors that make a sip an ideal way to invest in mutual funds to fulfill or to achieve life long-term financial goals:

SIP may inculcate the discipline of saving

With SIP, once you allow auto-debits, every month on the fixed date a predetermined amount is debited from a savings account and electronically transferred to the mutual fund. This way you are allocating a fixed amount to your mutual fund investments at regular intervals. In order to achieve success in once financial journey they need to inculcate the discipline of regular investing. Starting a mutual fund SIP can be one way to achieve that success.

SIP allows small investments for bigger dreams

Long term goals like retirement planning, or securing your children's future require one to accumulate a corpus worth Rs. 25 lakhs to Rs. 30 lakhs. To achieve this large corpus one needs to invest systematically at regular intervals. SIP allows investors to invest small amounts at periodic intervals. But this small investment amount cannot be less than the minimum investment amount mentioned in the offer document. To achieve life's bigger goals, small and regular SIP investments may prove to be beneficial.

SIPs pave way for power of compounding

In mutual funds, compounding refers to the interest earned on the interest earned from the initial investment amount. If there is one tool that can multiply small SIP investment amounts and turn into a decent corpus in the long run then it has to be compounding.

SIPs allow rupee cost averaging

When the NAV (net asset value) of a mutual fund is low, more units are allotted in quantum with the SIP investment amount. Similarly, when the NAV of a fund is high lesser units are allotted. This is referred to as rupee cost averaging which minimizes the risk associated with market volatility.

You can stop the SIP at any given time

Although one needs to continue investing systematically via SIP if they are to get closer to their life's financial goals, sometimes investors make the mistake of investing in a fund that is does align with their investment objective. Once you realize that you have invested in the underperforming fund there is no point of continuing investments in that fund. One good thing about SIP investments is that investors can stop their monthly investments at any given time. SIPs do not have a lock in period. If the mutual fund you started an SIP in is underperforming investors can stop the SIP and switch to a better performing fund depending on their investment objective.

SIPs offer flexibility

There is no compulsion stating that investors should make monthly SIP payments towards their mutual funds. It is true that one should never skip or stop their SIP investments but we can never tell what financial emergencies life will throw at us. Since SIPs are flexible in nature you can skip a month's payment in case of a financial emergency.

Investments in mutual funds via SIP are known to offer capital appreciation over the long term. However mutual fund investments do not guarantee returns. Hence investors are expected to consult their financial advisor before making an investment decision.

Mutual fund investments are subject to market risk, read all scheme related documents carefully.