Invest in SIP: Why Systematic Investment Plans are a Smart Choice for Beginners
The financial markets give investors many avenues to potentially build wealth over time and earn returns that outpace inflation. However, learning the ins and outs of the stock market, dealing with the risks involved and planning investments can seem challenging to beginners.
However, Systematic Investment Plans or SIPs can provide a simple, disciplined, and flexible approach. Let’s look at why SIPs in mutual funds are a beginner-friendly option and how they can help you potentially build wealth over time.
What is SIP and how does it work?
SIP, or Systematic Investment Plans, is a method of investing in mutual funds. Through SIP, you can invest a fixed amount of money in a mutual fund scheme at regular intervals (daily, weekly, monthly, quarterly etc.). When you invest in SIP, you don’t need to worry about timing the market or figuring out when to buy or sell; instead, you commit to investing consistently over time.
Why SIPs suit beginners
Here are the key features of SIPs that make them a suitable starting point for new investors:
1. Low barrier to entry
One of the biggest advantages of SIPs is that they allow you to start with small amounts. You don’t need a large sum of money to begin investing in SIP; you can start with as little as Rs. 500 per month. For young investors who may not have a big savings pool, this flexibility is helpful. You can start with small amounts and gradually increase your investment as your income and familiarity with the financial market grow.
2. Power of compounding
When you invest in mutual funds, you can benefit from the power of compounding. Compounding happens when the returns on an investment are reinvested and earn further returns. Over time, as the investment base keeps growing, compounding can have a multiplier effect on your corpus. The earlier you start, the more time compounding has to work, making it beneficial for long-term wealth creation. This makes it possible to build wealth over time even through affordable instalments.
3. Rupee cost averaging reduces market risk
Market ups and downs are a natural part of investing, and they can feel intimidating for beginners. However, when you invest in SIP, you benefit from a concept known as rupee cost averaging. This means that during market lows, your fixed SIP amount buys you more units, and during market highs, it buys fewer units. Over time, your average per-unit cost can even out, reducing the impact of market volatility. This approach is particularly reassuring for beginners who may be nervous about market fluctuations.
4. SIPs promote disciplined investing
A common mistake beginners make is trying to time the market, buying and selling based on predictions or market movements. However, market timing can be tricky and often leads to missed opportunities. SIPs encourage a disciplined approach to investing by automating your contributions at regular intervals. This “invest and forget” method ensures that you’re investing consistently, regardless of market conditions, which can lead to more stable and potentially higher returns in the long run.
5. Goal-oriented investments made easy
When you invest in SIP, you can easily link your investments to specific financial goals. Whether you’re saving for a down payment on a house, your child’s education, or retirement, SIPs allow you to plan and invest according to your time horizon and risk tolerance. By setting up an SIP aligned with your goals, you have a structured and goal-oriented approach that can help you work towards your financial objectives more effectively.
6. Flexibility to increase, decrease, or stop anytime
A significant advantage of investing in SIP is flexibility. Unlike traditional avenues that might require a long-term commitment, SIPs offer the flexibility to adjust your contribution or even pause the investment when needed, without penalties. If your financial situation changes, you can increase, decrease, or stop your SIP (though it is advisable to stay invested for optimal return potential). This makes SIPs suitable for beginners who may want to adapt their investments as they learn more about managing money.
How to invest in SIP
Starting an SIP in a mutual fund is simple and doesn’t require much prior investment knowledge. Here’s a quick guide:
- Set your financial goals: Decide what you’re saving for – whether it’s a short-term goal like a vacation or a long-term one like retirement.
- Choose a mutual fund scheme: Research and choose a fund that aligns with your risk tolerance and financial goals. Equity funds are generally suitable for the long term, while debt funds, being less risky, offer relative stability with reasonable growth potential in the short term.
- Decide an amount: Determine a suitable amount that aligns with your goal. You can take the help of a mutual fund SIP calculator for help with investment planning. The calculator helps you see the potential future value of your investments based on your investment amount, tenure and expected returns. Do note, however, that actual returns may or may not be along expected lines and depend on market conditions.
- Set up your SIP: You can set up your SIP through the mutual fund company, a distributor or a trusted investment platform. Choose the amount and frequency (the monthly option is most common) based on your comfort level.
- Stay consistent: Once your SIP is set, stick to it. Avoid stopping or pausing unless absolutely necessary.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.