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What is a Systematic Investment Plan (SIP)?
A Systematic Investment Plan (SIP) is a method of investing offered by mutual funds, allowing investors to invest a fixed amount of money at regular intervals (typically monthly or quarterly) into a chosen mutual fund scheme. Instead of investing a large lump sum at once, SIPs enable you to invest smaller amounts periodically. This approach helps in disciplined investing, averaging out purchase costs, and potentially benefiting from the power of compounding over the long term.
How SIP Works
When you start an SIP, a predetermined amount is automatically debited from your bank account on a specific date and invested in the mutual fund scheme you've selected. You get allotted a certain number of units based on the Net Asset Value (NAV) of the fund on that day. Since the investment happens regularly, regardless of market conditions, you buy more units when the market is low and fewer units when the market is high. This is known as Rupee Cost Averaging.
Pros of SIP
Disciplined Investing: SIPs instill a habit of regular saving and investing, crucial for long-term wealth creation. Automation ensures consistency without needing active intervention.
Rupee Cost Averaging: By investing fixed amounts regularly, you average out the cost of your investment. You buy more units when prices are low and fewer when prices are high, potentially reducing the impact of market volatility.
Power of Compounding: Returns generated on your investments are reinvested, generating further returns. Over the long term, compounding can significantly boost your wealth. Starting early maximizes this benefit.
Convenience and Flexibility: SIPs are easy to set up and manage. Most fund houses offer online platforms. You can usually start with small amounts (as low as ₹500), and you can often modify, pause, or stop your SIPs as needed.
Accessibility: SIPs make mutual fund investing accessible to small investors who may not have a large lump sum to invest initially.
Cons of SIP
Market Risk: Like any investment linked to the stock market, SIPs in equity mutual funds are subject to market risk. The value of your investments can go down as well as up. There's no guarantee of returns.
Doesn't Eliminate Risk Entirely: While Rupee Cost Averaging helps mitigate timing risk, it doesn't eliminate investment risk. If the market enters a prolonged downturn, your investment value could decline significantly.
Potential for Lower Returns in Bull Markets: In a consistently rising (bull) market, a lump sum investment made at the beginning might generate higher returns than an SIP spread over time, as the entire amount benefits from the rise from day one.
Exit Loads and Expense Ratios: Mutual funds charge fees (expense ratio) for managing the fund. Some schemes may also have exit loads if you redeem your units within a specific period. These charges reduce your overall returns.
Requires Long-Term Commitment: The benefits of SIPs, particularly compounding and averaging, are most pronounced over longer investment horizons. They may not be suitable for very short-term goals.
Disclaimer: Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. The calculator provides estimated returns based on inputs and does not guarantee future results. Past performance is not indicative of future returns. Consult with a financial advisor before making investment decisions.