Tips To Invest In Systematic Investment Plans (SIP)

Why to save money and invest when you can spend to your heart's content and have a whale of a time. The answer is simple. Savings are important and investments can provide you with profits in the long term. So how should you go about investing to keep your financial future secure? Let's check out.

Very often women say – "I don't have time to invest," or "I can't afford to put away a lot at this point". Then they have not heard of SIP. Systematic Investment Plan or SIP allows you to periodically invest small fixed amounts, which grow at a compounded rate into a substantial amount at the end of your long-term plan. An SIP is a service offered by mutual funds and provides you, the investor, with an option of committing a small quantity of money regularly towards investing as opposed to a lump sum investment.

Why SIP is good

A systematic investment option such as the SIP enables you to build wealth over a long-term horizon. Generally, investors look to time the market. This practice is futile and more often than not, investors buy when share prices are rising and sell when the share prices are on a decline. This is in stark contrast to the sound principle of equity investing – Buy when the price is low, sell when it is high.

So how does SIP help in this regard? Since the amount invested each month is fixed, what changes is the net asset value (NAV). So, when the prices are down, the NAV dips, which means that you get allotted more units of the fund. Similarly, when prices rise, you get allotted more units, plus the return on your earlier units, acquired at lost cost rise. This does away with the risky business of timing the market and ensures that you invest in a disciplined manner.

So you save and invest in an SIP, but do you know why and how an SIP is good for you, especially as a woman investor? First, let us know why an SIP works in your favour. Generally, women save and spend in equal amounts, though there are times when you find your hand reaching more towards your savings pocket to compensate for the shortfall in the spending account. A sure shot way to ensure the funds stay separate is to keep them in two different accounts, and then introduce the concept of SIP to your savings account! A systematic investment plan will enable you to maintain your savings in a disciplined manner and will also help you make money over the long term.

How SIP works

A systematic investment plan is not much different than the savings option of a recurring deposit account with a post office or a bank, except that these small monthly amounts are invested in a mutual fund. The SIP option is available with all types of funds like equity, income or gilt and works in your favour as the NAV is averaged out as opposed to a one-time buy. As you will be investing at regular intervals, the NAV may be higher or lower depending on market fluctuations.

The table above clearly shows how your cost of purchasing the units of any fund comes down and how a sense of discipline is instilled while investing even when there are swings in the NAV due to volatility in the market.

SIP leads the way

A key lesson learnt is let's not get carried away by putting all our eggs into one basket, hoping that the goose will lay a golden egg. Instead, it's wiser to space out our investing into specific time frames which will benefit us in the longer run, i.e., the systematic investment plan! Remember, slow and steady wins the race!