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Systematic Investment Plan – A time honored investment strategy

Wealth creation is an art and over the years it has changed its avenues and area of interest for investors. Earlier post offices and banks were excellent route to create wealth for the public at large but over the past few years the Indian equity market along with mutual funds has emerged as a hot favorite of every investor.

Mutual fund is a pool of money invested in accordance with the common objective stated before the investment to the investors. It provides the right opportunity to investors who lack ideas, expertise and/or time – to profit from the equity markets.  A variety of schemes are available to investors, including Debt-Oriented schemes, Equity Schemes, Balanced Schemes, Equity-Linked Savings Schemes, Money Market Schemes, Sector-Specific Fund, Index fund, etc. An investor in MF generally chooses the scheme as per his investment objective, risk profile, time horizon, etc. Here one can choose a fund depending how much risk he/ she is willing to take and when he/ she wants the money back. Ever since the equity markets have been enclosed by volatility, it is advised to invest through SIP route for the long-term investors.

In this article, we will discuss what is SIP and what are the benefits of SIP? SIP or systematic investment plan is a simple and time honored investment strategy for creation of wealth in a disciplined manner over long term period. It aims at a better future for investors by giving a good rate of return as compared to one time investor in volatile market by lowering the average purchase cost. It is evident from the recent slowdown that the Mutual fund invested trough SIP route has prevented the pitfalls of equity investment and is enjoying the high returns, if compared.  So it makes all the more sense today when the stock markets are volatile.

Below are some of the benefits of SIP.

Power of compounding:  If money is invested at an early age one can make money work with greater power of compounding with significant impact on wealth accumulation. The below table shows the impact of the power of compounding with different rates of return and at different time periods.

Rupee cost averaging:  It is not so easy to predict the movements of the market. Timing the market constantly is a difficult task for everyone. An automatic market timing mechanism that eliminates the need to time one’s investments is Rupee cost averaging. Here one does not have to bother about the ups and downs of the share prices or about the interest. Because investment of a regular sum is done at regular intervals with fewer units being bought ordinary stocks  and more units in Blue Chips stocks, which often gives good returns. Though SIP does not guarantee profit, but one can invest through it as it goes a long way in minimizing the effects of investing in volatile markets. 

Convenience: It is very easy and convenient to operate through SIP route as it could be done by simply providing post dated cheques with the completed enrolment form or give ECS instructions. The cheques can be deposited on the specified dates and the units credited into the investor’s account. The SIP facility is available in the Principal Income Fund, Monthly Income Plan, Child Benefit Fund, Balanced Fund, Index Fund, Growth Fund, Equity fund and Tax Savings Fund.

SIP features: If one would like to earn a good return from its principal then he should have a disciplinary approach. The disciplinary approach is a vital to earning good returns over a longer time frame.  Once invested through sip route, investors are saved from bothering to identifying the ideal entry and exit points from volatile markets.

Conclusion: Though SIP resolves a dilemma often facing investors due to ups and downs in the market price but investor finds it difficult to decide when to invest in the equity scheme. The success of investors SIP hinges on the performance of his/ her selected scheme. If the investor is able to make wise decisions and make the best of the Indian volatile market, SIP is definitely a powerful tool to create wealth over time.