A Systematic Investment Plan (SIP) is one of the most efficient ways to create wealth through the power of compounding. In this article, I will explain everything about SIP and its three benefits.
What is SIP?
In simple terms, an SIP allows you to invest a fixed amount of money every month into various mutual fund schemes. This amount is automatically debited from your bank account and invested into the selected schemes without requiring any further action on your part.
The best way to look at SIP is by calling it - Sapna In Progress. For every financial goal of yours, you must allocate a sufficient amount of SIP.
Three Benefits of SIP
1. Simple and Convenient: Once you set it up, the money is automatically deducted from your account and invested in your chosen set of schemes. There is no minimum or maximum limit. You can start as low as INR 1000. The higher the SIP, the more you benefit in the long term. Hence SIPs are very welcoming due to its flexibility and accessibility to all kinds of investors. However, it is crucial to consult with a financial advisor to help you select the right schemes based on your financial goals and risk tolerance. Financial advisors bring valuable education, wisdom, expertise and experience to the table, ensuring your investment strategy is sound.
2. Automated: After the initial setup, SIP is a hands-off process. Once your account is opened and mandate is registered, the future contributions are automatically debited on the chosen date without any further involvement. Wealth is built with minimal effort.
3. Rupee Cost Averaging & Compounding: SIP takes advantage of market fluctuations through a concept called rupee cost averaging. When the stock market is high, fewer units are bought; when the market is down, more units are purchased at lower prices. This strategy helps you build wealth steadily over time, as more units are accumulated at a lower average cost. Over the long term, the power of compounding amplifies the growth of your investment, enabling significant returns as the market recovers and rises.
How Much Should You Invest?
A general guideline is to allocate at least 25% to 30% of your monthly income toward SIPs. As your income grows over time, you should increase your SIP contributions accordingly. Every 12 months, review and adjust your SIP to match your rising income, ensuring you continue to invest a substantial portion of your earnings.
Is Your SIP Sufficient?
One key point to consider is whether your SIP contributions are sufficient for your long-term financial goals. There is no "small" or "big" SIP—only adequate or inadequate. To determine this, you need to calculate how much money you will require after 5, 10, or 20 years, factoring in inflation and your financial objectives. This will give you a clearer picture of how much you need to invest monthly to meet your goals.
SIP is a powerful investment tool that simplifies the process of building wealth over time. SIPs are not just about investing money; they are about cultivating a habit of disciplined, consistent investing that helps secure your financial future.
(The author is a Chartered Accountant and CFA (USA). Financial Advisor.
Views personal. He could be reached on 9833133605. )
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