SIP

SIP is a method of investing a fixed sum, regularly, in a mutual fund scheme. SIP allows one to buy units on a given date each month, so that one can implement a saving plan for themselves. An SIP is generally preferred for an equity scheme and can be started with as small as Rs 500 per month. The biggest advantage of SIP is that one need not time the market. Rather than timing the market, investing every month will ensure that one is invested at the high and the low, and make the best out of an opportunity that could be tough to predict in advance. SIPs thus make the volatility in the market work in favour of an investor and help in averaging out the cost called “Rupee Cost Averaging”. For example, with Rs 1000 one can buy 50 units at Rs 20 per unit or 100 units at Rs.10 per unit depending upon whether the market is up or down. Thus, more units are purchased when a schemes’ NAV is low and fewer units when the NAV is high. Hence, when the two cases are taken together, cost is averaged out. The longer the time-frame, the larger are the benefits of averaging. SIPs also help in availing benefits of compounding. This means the earlier one starts an SIP and longer the investment horizon, the larger the benefits. The reason being, each rupee one invests earns a return, which ends up as more rupees to earn a return, allowing investment to grow at a fast pace. Higher rates of return or longer investment time periods increase the principal amount in geometric proportions. This is the single most important reason for investors to start investing early and keep on investing on a regular basis to achieve the long-term financial goals.