Systematic investment plans or SIP as an investment mode has in recent time gained favour with both investment advisors and investors. And to meet long term financial goals, experts generally recommend a SIP in equity mutual fund if the investor has a penchant for a moderate to high risk. This investment advice is part of a strategy that helps in wealth creation through disciplined investing over a longer tenure.
So, here are some of the reasons that make SIPs a must-have in an individual's portfolio:
1. Inculcates financial discipline: The first and foremost advantage of investing in SIP is that it makes the investor financially disciplined as the avenue demands regular investing of a fixed sum over some pre-determined tenure. The amount committed towards the SIP scheme need not be large and in some cases has even lowered to Rs. 100 for a month.
There is also the provision to step-up your investment in SIP as and when your fund flow increases and you wish to reach your financial goals in all likelihood. So, without being influenced by the market conditions, SIP forces an investment from your side. You can decide for the auto-debit of your SIP amount at a date just after your salary date such that you don't end up spending before investing.
2. Compounding benefit: As SIP investments are committed for a longer tenure, compounding is certainly the biggest advantage and investors are hence able to rake in superb gains. Experts recommend investors to start SIP investment early in their career as even large amounts deployed later in life towards this investment mode will not be able to make up for the lost tenure.
Say for instance, if you begin to invest Rs. 1000 per month in an equity-oriented SIP scheme for a goal that falls 10 years later, with a return of 12% on the investment you can get a corpus of nearly Rs. 2.3 lakh after 10 years. But in a case when you start your SIP investment for meeting the same goal that now is just 5 years away with a Rs. 1500 per month, you will be able to accumulate around Rs. 1,20,000 after 5 years (considering the same rate of return).
3. SIP investment helps to average out purchase cost for the investor: In case of mutual fund investment via SIP, regular investment of a certain fixed sum can fetch you more fund units in the case when NAV of the fund is down by some points or otherwise. Say when you park Rs. 1000 in a certain month, with NAV of the fund being Rs. 20, the number of units then allotted to you would be 500 and when you again invest a same sum of Rs. 1000, you can be allotted higher or lower number of units depending on the NAV price at that time.
Further, the general tenet holds that over the term of the investment, investor generally ends up realizing higher units as otherwise in the case of one-time investment made. Also, more number of units will fetch higher returns.
So, in all a regular investment of some pre-determined sum helps an investor to average out the cost of the investment over the investment tenure. And it is on the average cost of investment that your returns are based instead of the cost that you incurred for each of the mutual fund unit so you presumably earn better returns.
4. Investing via SIP mode helps to meet out future big-ticket financial goals: Unless you have inherited huge wealth from some source, it may be quiet a tough task to finance some of the big-ticket expenditures that may fall due for you in some years from now. So, as a proactive approach you should begin to accumulate for goals such as higher education of your children, buying your dream house and wedding etc well in advance by investing some amount regularly over a period of time.
5. Diversification: Another advantage of taking the SIP route for investment is diversification as it allows you to spread the risk over multiple investment options such as debt, equity and G-securities even with the small amount.