A Systematic Investment Plan (SIP) is the best way to make investments into mutual funds. With an SIP, you have an option of managing your investment according to your income. It will enable you to bring financial discipline in your life and will cultivate a habit of saving. It will help achieve your goal of wealth generation.

SIP is a form of making investments in regular installments. This can be in the form of a quarterly, weekly, or monthly basis. You can determine the period of investment as per your convenience. When you set up an SIP, a fixed amount is debited from your account as per schedule and the pre-decided number of units are allocated to you. The mutual fund plans are very flexible in nature, which means you can increase or decrease the amount of SIP as per your preference.

How does a SIP work?

The operation of an SIP is very similar to that of a mutual fund. Your money is managed by professionals and they invest in stocks and bonds as per your risk appetite and financial goals. You earn compound interest on the SIP, which makes your wealth grow. Due to compounding, the interest earned will be calculated keeping the base capital and the additional investment amount in mind. This means you earn interest on the total amount invested by you until now.

In addition, your average cost of purchase will also decline. When the market is on the rise, you purchase a certain number of units at the higher Net Asset Value (NAV) and when the market is at a low, you end up purchasing a higher number of units, due to the low NAV. This means your average cost of purchase will come down over the period of investment.

Is SIP meant for you?

There are various benefits of an SIP. If you invest a lump sum amount into mutual funds, you might have to incur a high buying cost for the mutual fund units. You will also end up buying lesser number of units because of the high NAV of the same. At times, it also works in your favor. If the market is low and the NAV of the units is low, you could be able to buy a large number of units at the same cost. However, it is difficult to time your entry into the market.

You also need to consider the impact of inflation when it comes to investing in mutual funds. If you invest a lump sum amount today, your savings might not be enough by the end of the investment tenure because inflation grows faster than the returns. You can play safe by opting for an SIP, where the investment amount is fixed for a specific period of time. It neutralizes the impact of market movement and the overall cost of investment comes down. It will help you achieve your financial goals and you have the flexibility to manage the amount of SIP.

Benefits of SIP

If you still have your doubts, here are some benefits of SIP that need to be considered.

• Affordable investment option

SIP is one of the most affordable investment options. It allows you to invest the amount keeping your monthly income in mind. Additionally, you have complete flexibility to increase or decrease the amount, as per your requirement. If your monthly income rises, you can choose to increase the amount of investment and if you have a financial debt, you can decrease the same.

• No entry or exit charges

Once you make an investment in an SIP and feel that it does not fit your needs, you can choose to exit from the investment plan without incurring any costs for the same. There are no entry or exit charges on the investment. This feature makes it one of the best investment options for you.

• Easy to manage

An SIP is easy to manage because the investment is handled by professionals. You need not understand the market movement or research the companies that are performing well. The industry experts will smartly manage your portfolio. You only need to determine the amount of money you want to invest.

If you have been wondering where to invest money, SIP is the best option for you. Whatever your long-term financial goals are, an SIP will help you achieve the same. When it comes to investing through an SIP in mutual funds, it is not how much you invest but for how long you remain invested. You need to remain patient when it comes to SIP, as your wealth will not grow overnight and you will have to wait for the tenure to end in order to achieve the results. SIP will not only bring you closer to your financial ambitions results but will also bring financial discipline in your life.

You can set up different SIPs for different goals and ensure that you are making regular investments in the same. For instance, you can set up SIPs, for your retirement, to achieve specific long-term goals like buying a house, or for funding your child’s education. You need to remain consistent with your SIPs and never skip the payment in order to generate higher returns in the long run. If you start early, you will be able to generate better returns in the long period.