Why Should We Invest in SIP?

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Have you ever thought about the good things of SIP and why everyone invests in SIP? Well, the main reason for recommending SIP is to maximize the profit. Today we are discussing in detail why should we invest in SIP?

Whenever you think of a long-term investment plan and ask some expert about the same, he/she will suggest you to start investing in a Systematic Investment Plan (SIP). Here, we are discussing the advantages of investing in SIP:

  • Advantage Because of the Power of Compounding: The meaning of compounding is to earn interest by investing again in the earned interest. In this way, the compounding can turn a small amount of money to a large corpus, if invested regularly. The experts of investment suggest starting to invest with a small amount at an early age than waiting for a big amount to start the investment. For example, if you start investing Rs.1, 000 monthly in an equity scheme for meeting your long term goal of 10 years, then with 12% return you will get approximately Rs.2, 32, 339 after 10 years. On the other hand, if you start investing Rs.1, 500 for a goal of five years, you will get approximately Rs.1, 23, 729 after five years.
  • You Include Financial Discipline in Your Financial Routine: Since most of us start investing in SIP in order to make a profit, but the one good habit that comes with it is financial discipline. Many of us start and then stop investing, the start of investment shows their optimistic approach whereas stopping the investment shows their pessimist approach. However, the SIP puts these doubts in an end as you invest regularly in it. In SIP you have to pay a fixed amount of money on a regular basis irrespective of the conditions of the market. Since the money is debited directly from your account, thus there are very fewer chances for you to miss the investment. You can as well set the SIP payment date soon after your date of salary to avoid money spending before the date of SIP. The main reason for the same is – only a small investment can create large corpus in a long period of time. The simple example to understand this is – the retirement corpus that you cannot create overnight. Instead, you have to invest regularly in order to make a corpus of approximately Rs.1 Crore for your retirement.
  • To Average Your Purchase Cost: Stock market is very well known for its volatility and the investors try to avoid this problem by the market timing. This is, they purchase when the market is down and sell when the market is up. However, it is not easy for everyone to match the timings. This is because you can never know when the market can hit the bottom or goes high. Therefore, in order to average put your investment is to invest a small amount regularly for a long period of time. We are here giving a table that explains why should we invest in SIP? This table shows how SIP averages out the cost price. For this example, we are assuming that the NAV price is fluctuating between Rs.97 to Rs.105. Suppose the amount you invest in your SIP is Rs.2, 000 per month and the average cost price is most of the times low over a longer period of time.

 

Date of SIP

NAV

SIP Amount

Number of Units (Amount of SIP/ NAV)

10-June-2016

100

Rs.2, 000

20

10-July-2016

105

Rs.2, 000

19.05

10-Aug-2016

103

Rs.2, 000

19.42

10-Sep-2016

100

Rs.2, 000

20.00

10-Oct-2016

98

Rs.2, 000

20.41

10-Nov-2016

97

Rs.2, 000

20.62

Total

 

Rs.12, 000

119.49

Average Cost Price of SIP

Rs.100.43

 

  • Lower Investment Cost: It is always good to have expectation from your investment, especially when you are investing in equity scheme like SIP. The reason for the same is you get a robust strategy for making money. In SIP, you do not need to invest a large amount instead with a steady investment of a lower amount you can make money. In this investment, the fund manager keeps purchasing the units of the said schemes of mutual funds through your monthly SIP despite the stock market's state. In this way, with the lower investment, you can make a big corpus in some time.
  • You Can Easily Achieve Your Financial Objectives: Not having any plan makes it difficult to achieve anything that you want. You may have a plan of purchasing a house, but do not know how to achieve. Since purchasing a house is a big project, so starting early is suggested. If you start investing regularly even with a small amount for a long period of time in the investments like SIP, you can easily achieve your goal. In this way, SIP works as a way to easily achieve your financial goals, but to be clear about your goals is all that is needed. This is because; with a goal in your mind you can make the decision of how much you want to invest and for how long.

Final Words: These are some of the reasons to show you why we should invest in SIP. However, SIP is one of the prudent ways to achieve your financial goals, but all you need to do is to stay committed in regular investment. However, return through funds is not guaranteed and always subject to the risks of the market still SIP is one of the safest ways of investment for salaried people.