Many mutual fund investors are choosing Systematic Investment Plans (SIPs) as the preferred mode of investing in the instrument. The popularity of the facility is justified because of the plethora of benefits that it provides. In this article, we will explore some of the benefits of SIP investing and also see an illustration which shows how the facility benefits investors.
One of the biggest benefits that SIP provides is instill investment discipline and force saving. Ensuring that you put away a certain amount of your take home pay for investment is one of the hardest things to inculcate in the consumption driven world of today.
By its design, SIP makes you invest a fixed amount in a mutual fund scheme at regular periods, typically monthly. Since after signing up for an SIP, the amount that you have decided to invest automatically gets deducted from your account, you are forced to save that much in order to ensure the continuity of the investment.
Once this discipline takes hold, your money starts getting deployed in the financial markets according to the underlying portfolio of your chosen fund. This periodic investment ensures that rupee cost averaging is working for you.
The concept says that sustained and regular investment averages out your cost of investing in the fund. When the NAV of the fund is high due to favorable market movement for its portfolio, then you will be allotted relatively less number of units. On the other hand, a fall in NAV would result in more units. This averaging may help you reduce the average per unit NAV and thus increase your chances of a higher return in the long-term.
A related benefit is the power of compounding. Making small investments consistently is easier than making large ones at elongated gaps. Smaller investments can also help you begin your investment journey much earlier than otherwise. You can always increase the size of your investment as your salary rises.
The earlier you begin investing, the more you let the power of compounding work, which can result in a much higher corpus than beginning later, even with a much higher amount. Combined with rupee cost averaging, SIPs allow you to start small and increase the investment size later to make the most of compounding for the longest period of time.
With SIPs, one does not need to time the market either. When we look back at stock market performance, it seems a great idea to invest at the bottom as it results in a much superior portfolio performance. But the key question there is how does one identify that the market has reached a bottom? When you try to take a hit or miss approach, you are essentially trying to time the market. Even experts with several decades of trading or portfolio management experience cannot claim expertise when it comes to market timing. So, if novices and investors with above average expertise try to time the market, the chances are high that they are committing an error.
Since SIPs average out the per unit cost of holding a fund as you have invested across the peaks and troughs of the market, you don’t need to worry about market timing.
Finally, one of the most satisfying benefits of starting an SIP investment is the convenience that it brings with it. You can either approach a trusted investment advisor to set up the facility in a fund of your choice or make use of any other intermediary like a wealth manager or a bank. You can also leverage one of several mobile and web-based applications which can help you initiate and modify an SIP as well as providing suggestion on fund which fit into your objectives.
Illustration of SIP benefit in a declining market
In order to showcase the benefit of an SIP, let’s consider a declining market which rises towards the end of the investing period to help investors make a small profit.
Two investors J and K are invested in the same fund for 12 months with the total invested amount being Rs 60,000. While J invests the amount in lump sum at the beginning of the period at a per unit NAV of Rs 25, K chooses the SIP mode. The following table represents his investment:
|Month||SIP amount||NAV||Number of units|
Let’s consider Rs 27 to be the end of period per unit NAV. J holds 2,400 units in the fund while K ends up holding over 2,700 units. Their portfolio value is Rs 64,800 and Rs 73,461 respectively. Though both have made a profit, the profit for K is much higher because he was able to accumulate more units because of the SIP mode of investment. Thus, even in a mostly declining market, SIPs helped out K to eke out a much higher gain than J. To get maximum benefits out of your Investments, you need to always look out for the perfect plan that can guarantee proper and satisfiable returns. OroWealth offers the best SIP investment plans that can be very helpful for your investments.