Introduction
How can you give yourself a promising chance of reaching your financial goals? One way to do this is to set up automatic regular investments to stay on track and arrive at your financial destination faster. That way is none other than a Systematic Investment Plan [SIP], which allows you to meet a big goal through small yet regular investments. Let’s find out all about SIPs and how they can work for you.
What is SIP investment?
A Systematic Investment Plan or SIP investment is a systematic investment approach that allocates a predefined sum of money in a mutual fund of your choice at regular intervals. As a recurring or periodic investment plan, a SIP enables you to set a fixed amount to be invested in a fund, thus providing you with several benefits in meeting your financial objectives.
How does a SIP investment work?
A SIP works on the following principles. They are:
- Rupee cost averaging. A vital aspect of a systematic investment is rupee cost averaging, which uses the regular and periodic purchase of fund units. This strategy helps in reducing the overall cost per unit of the assets and removes the potential of making poor choices based on market volatility to ups and downs. That means, when markets rise, your SIP gets you fewer units, and when the market falls, you get to purchase more units. In the long run, rupee cost averaging minimizes your risk and enables you to acquire investments at a lower average price per fund unit.
- Power of compounding. Steady investments over an extended period can tremendously impact your investment, all thanks to the power of compounding. For example, your SIP investment over an extended time frame helps you earn returns on the returns earned by your investment, which is regarded as compounding. Also referred to as the eighth wonder of the world, the power of compounding enables you to collect a considerable corpus over the long run that can meet your long-term financial goals — all with small and regular investments.
- Behavioural finance. When you choose to automate your investments, you also choose to get rid of several behavioural biases. Within the realm of personal finance, behavioural finance reveals how specific human actions and negative emotions can impact one’s investments more than the choice of investment or asset allocation. Investors tend to make poor choices in the presence of strong emotions. For example, some investors tend to purchase high-risk assets when the stock market rises.On the other hand, when stock prices tumble, some investors panic and sell their investments. The concept of buying high and selling low becomes a direct contrast to smart and wise investing.
With a SIP, emotional feelings are removed from your investment decisions as fund units are purchased without your manual intervention and in advance over time. That means your SIP continues to invest without considering stock market movements or disregarding rumours. If you are looking to start your SIP journey, learn more about the wide range of mutual funds at ICICI Direct.
Advantages of SIP investments
- Helps build financial discipline. The notion of setting it and forgetting it through your SIP helps instil financial discipline. Its automatic schedule enables you to build a large amount without affecting or compromising your lifestyle.
- Provides flexibility. An SIP offers flexibility in investing. That means you can choose to increase or decrease the SIP amount at any time by giving instructions to the AMC.
- Offers convenient mode of investment. A SIP is a hassle-free mode of investment. You can choose to do it online with a one-time set of eKYC [Know Your Customer] instructions and watch your SIPs get automatically accumulated over time.
- Helps spread your investment. If you choose to invest in a mutual fund through a lump-sum method, it could expose you to higher capital risk. On the other hand, a SIP spreads your investment and brings down the risk to capital, thus helping you sail across stock market volatility better.
Conclusion
A Systematic Investment Plan is an ideal way of automatically putting your money to work in mutual funds without thinking about it. Setting your investments on an involuntary schedule through SIP can get rid of the potential of timing your investments as well as allowing emotions to come in the way. So it’s time to jumpstart on the idea of ‘setting it and forgetting it’ in the right mutual fund that addresses your goals with ICICI Direct today.
