There are several strategies of investing and the most commonly suggested one is looking for investments, booking profits, and finally exiting. Then there are also those who vouch for the mantra of ‘invest and hold.’ There are also those investors who are of the opinion that rebalancing of portfolio across asset classes like debt and equity is vital.
Despite the fact that many theories of investment are currently in existence, it is better for retail investors to go for consistent investments. It is a known fact that no one can consistently time or predict the markets, chasing the above strategies is a waste of time. It is best to opt for the investment plan of cost averaging theory, which is popularly referred to as SIP or Systematic Investment Plan.
SIP is a smart tool that helps investors plan their finances and create wealth over a specific time frame. The step by step building of wealth can begin with a monthly SIP of INR 2000 and gain from the benefits of rupee-cost averaging and the power of compounding. Such a disciplined financial approach assists investors in hedging their investments against factors like inflation, etc.
Presented below are some advantages of Systematic Investment Planning and why you should invest in mutual funds through SIP.
- Disciplined approach to investment
Some investors go for stocks and time the market to amass wealth. It is however important to note that timing the market is based on different factors such as research, market knowledge, lots of time, and technical analysis, etc. It also comes with great risk. But with regular and disciplined investments, worry about when and how much to invest is not there. Thus, there is no need to actively keep a track of the market conditions. SIP is a form of investment that helps investors achieve such peace of mind.
With SIP, investors have to invest a certain amount to money on a regular basis irrespective of the conditions in the market. This thus imparts a financial discipline to investments.
- Benefits of rupee cost averaging
The investment strategy of rupee cost averaging is very effective in eliminating the need for timing the market. Investors just have to invest a fixed sum of money regularly for a pre-decided period of time. As the fixed amount is constant, investors purchase more units when the cost is lower and fewer units when it is high, thereby resulting in a reduced average cost.
SIP takes advantage of such rupee cost averaging.
- Simple, easy to track, and convenient
People do not have to take appointments to invest money via SIP. After filling out an application form, you only need to go for the auto-debit facility or give post-dated cheques. You can then relax and track the progress of your investment via regular account statements.
In case of auto-debit as the money gets debited directly from bank account, there is no way that you will miss an SIP and neither will market conditions affect your investment decision. The SIP date can be set on the day after the salary day so as to make sure that you do not drain your account of money before the investment.
- Advantages of compounding
The main aspect of wealth creation is starting the process of investment early and then ensuring that investments remain regular. Investing even a small sum regularly can build up into a large amount. This will eventually result in creation of a significant quantity of wealth, which consists of your SIP contributions plus the returns which have compounded over the many years.
- Benefits of starting early
It is a known fact that the earlier that one begins saving, then easier it gets for creation of wealth. The same goes for investment. Thus if you start your SIP investments 40 years before retirement, then the sum that is accrued during retirement will be significantly more than the total sum that you will receive if you began investing 30 years before retirement.
The power of starting early does help build wealth.
How to smartly invest in SIP
- SIP investments should be planned. Frequent, periodic intervals like monthly, quarterly, or bi-annually increase the options of purchasing units when the cost is low.
- Chalk out a detailed long-term plan of SIP investment. SIP will help reap rich rewards when investment period is long term. Investors who invest for a long period of time usually gain more profits due to the tendency of markets to appreciate in the long run.
- Ensure that the investments are diversified. Investments in mutual funds are diversified and hence this instrument is ideal for getting optimal returns with reduced risks.