SIP is Systematic Investment Plan. Is it a surefire way to create wealth? Let’s investigate.
A method of investment, a systematic investment plan is an option that allows you to invest a specific amount at regulated intervals or frequencies, typically monthly in Mutual Funds.
How SIPs help create wealth?
In Hindi they say, “Boond boond se sagar banta hai.” This means, drop by drop and ocean is formed. This is true. And much like the principle of SIIP.
SIP is the way to build wealth by investing regularly in mutual funds. SIP has become a very popular way to invest during last few years. Close to 6,000 crores gets invested through SIPs every month.
Why SIP makes sense
1. You invest fix sum at fix date. The process is auto set through ECS from Bank. You keep emotion out of investing. Money goes out from bank to growing asset.
2. You invest at different market cycle. You lock in funds at different rate i.e. NAV. This helps price averaging.
3. Your fixed salary inflows and SIP outflows match every month, so investment happens systematically.
4. You have the opportunity to build a large corpus by investing small sums regularly. It puts discipline in you. We have many 10 year plus SIPs running, earning handsome returns.
5. Sips are generally suggested for longer duration of 10, 15, 20 years. It lowers the cost of investing in longer terms.
6. For a smaller investor looking to minimize market risks and participate in the stock market, SIP is the way to go.
When SIP doesn’t work
1. To state it plainly, SIP way of investing is very much linked to market and scheme returns, it does not guarantee returns. Investing in a bad scheme regularly does not mean you will get good returns.
2. When equity markets in a downtrend for longer periods and the economy is under recession for longer periods.
3. SIPs can underperform or you don’t get decent returns if the start point is upturn of the bull market. But this is true if holding period of asset is relatively short, say 1-3 years or so.
The bottom line
If one is new to investing and your income is regular and monthly, SIPs are the best way to get started and become disciplined. Discipline is a must when it comes to successful investing. An SIP is a good tool for those planning to invest for things like higher education, retirement, and the like, which are usually long term goals.
A SIP works best when you have a long time frame in which to stay invested and are not looking for immediate, get rich quick returns. If you are willing to park your funds until the market phases, whether bull or bear, stabilises, a SIP is worth taking a shot at.