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What Refers to the Systematic Investment Plan (SIP) in Mutual Funds? Why are they Important?

 23 Sep 2019

When you hear the word “mutual funds”, the first that comes in your mind is SIP (systematic investment plan). Just like how people have given Googling a synonym i.e. web searching, SIP and mutual funds are considered synonyms. But that’s not true! Mutual funds and SIP are different concepts.

Mutual funds are the modern investment category whereas SIP is the method of investing in these funds. Investing in mutual funds involve two methods i.e.

  • One-time payment (payment is processed in one go)
  • Lump-sum payment (payment is processed in instalments)

Also known as automated periodic investments, lump-sum transactions are considered the top investment methods for mutual funds investors. In simplest terms, SIP is the automated periodic investment plan where a certain portion of the money is automatically deducted from investors’ accounts weekly, monthly, or quarterly. Let's learn more about SIP and the reasons you should consider investing through this method.

Reasons You Should Choose SIP to Invest in Mutual Funds

Systematic Investment Plan is, so far, the most reliable investment methods of mutual fund investment. Here’s why:

  1. 1. You Get a Control Over Market Volatility

No one can control market volatility as it is completely based on the market condition. However, using the SPI method of investment, one can minimize market volatility conditions.

This is because investing through SPI allows you to balance out your monthly or weekly investment in mutual funds and receive maximum returns.

2. Reduce the Risk of Market Condition

You cannot predict the market conditions. There is no way one can know how the market will move in the future. That said, there is no point in waiting for the right time to make an investment.

When you use the SIP investment method, you balance out your investment in such a way that the market condition will have no impact on your earnings. Let's say; you have invested in mutual funds when markets are expensive. But as you keep on investing the money regularly, you will get good returns when the market condition fixes. Instead of investing all your money at once, consider investing it in instalments and earn good returns at the end of the maturity period.

3. Investors Do Not Need a High Budget to Invest

Another crucial benefit of investing through a Systematic Investment Plan is that you can start your investment for as low as 150rs per month. Now, you no longer need to wait until you earn enough to invest in mutual funds.

Using this smart and effective technique of SIP, anyone can invest in mutual funds. Furthermore, you don't have to make the payments every month manually. The scheme will automatically deduct the amount from your bank account and transfer it to the mutual fund's account.

4. Earn Good Returns

Have you ever heard of compound interest? Well, it is often considered the eighth wonder of the world. This is because compound interest is calculated on your returns. This means the investor not only gets to earn on their principal amount but the returns generated during this period. Hence, compounding can add to your overall earnings provided that you are paying in a lump sum.

5. SIP is flexible

Though you have to give a commitment to making a payment every month or week, SIPs are still considered a flexible option. You can increase or decrease the amount you pay through the SIP plan.

For instance, if you have got a promotion, you can increase the amount of investment. In fact, you can stop the Systematic Investment Plan for up to 3 months if you have a cash emergency.

 

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