Systematic Investment Plans (SIPs): A Beginner’s Guide to Wealth Creation

As personal financing is getting popular, a Systematic Investment Plan or SIP has emerged as a popular method for individuals to build wealth. Whether you are a new investor or want to diversify your portfolio, understanding SIP is essential. In this guide, let’s discover everything about SIP and how it can help you build a good portfolio.

What is SIP?

SIP stands for Systematic Investment Plan, an excellent investment method that allows individuals to invest a fixed amount regularly in mutual funds. SIPs are designed to encourage people to invest and save regularly, depending on market conditions. A SIP can start from as low as Rs. 100.

Types of SIP

Even though most rookie investors go for the basic SIP, you can leverage various SIPs as your income grows.

• Top-Up SIP: This is an amazing way to increase your investment as your income grows. For example, if you start with ₹1,000, you can raise it by ₹1,000 every six months through top-up SIP.

• Flexible SIP: Flexible SIP helps you adjust your investment according to your cash flow and preference. You can modify your investment amount according to changing circumstances.

• Trigger SIP: This type of systematic investment plan is designed for experienced investors that help them set activators that automatically shift investment to another scheme if there’s market volatility.

• Perpetual SIP: If you choose Perpetual SIP, there’s no fixed date. Your investment will continue until you halt them.

How Does SIP Work?

Before choosing a SIP for your investment, it’s essential to understand how SIP functions. When you opt for SIP, you choose a predetermined amount on a monthly basis. The amount will be debited from your bank account in the chosen mutual fund.

Your invested amount will perform according to the mutual fund scheme’s NAV, a pre-unit market value that fluctuates on a daily basis.

Benefits of Systematic Investment Plans

Why should you choose a systematic investment plan over other mutual fund tools? In that case, you have to learn the top benefits of choosing SIP:

Rupee Cost Averaging: SIP uses a strategy of rupee cost averaging that can help you by reducing market volatility. That means, when the price is high, your fixed amount buys fewer units and when the price is low, it will buy more units.

Flexibility: A systematic investment plan helps individuals maintain flexibility according to market conditions. You can stop, start, increase, and decrease your investment amount through the mutual fund scheme SIPs.

Discipline: SIP is a disciplined investment tool with a predetermined amount. Whether you are a student or a working professional, this method can encourage you to become a regular investor with its disciplined strategy. It’s the best way to create long-term wealth and fulfill financial goals.

Power of Compounding: Choosing SIP can be the best way to use the power of compounding. When you start early, it will help you by reinvesting your profit, increasing potential returns.

Professional Fund Manager: The best thing about mutual fund SIPs is they are managed by professional fund managers. An experienced fund manager is informed by market conditions and can implement the best strategies.

Long-Term Wealth Creation: SIP is designed for creating long-term wealth. If you are consistent, coupled with the power of compounding, you can get significant returns on a long-term basis.

Lower Risk: Short-term investment can be pretty risky, especially with a lump sum investment amount. However, you can lower the risk by choosing SIP and building a stable investment journey.

Who Should Invest in SIP?

As noted before, SIP is designed for everyone. Whether you are a beginner or an experienced investor, you can choose this tool to build your wealth. Keep reading the following section to learn who should invest in SIP:

• Beginner Investors: SIP is the best tool for rookie investors as it can help them build a good financial habit. Besides that, they can start their investment journey with a small amount.

• Long-Term Investors: If you are someone who wants to build long-term wealth, SIP is the best method. Apart from that, you can earn a significant return with compound interest.

• Budget-Conscious People: If you have a tight budget, you can choose as low as ₹1,000 SIP to start your investment journey.

How to Choose The Right SIP

If you are ready to invest in SIP, it’s essential to choose the right mutual fund scheme. Here are some useful tips that can help you choose the best systematic investment plans:

Set a Goal: Start the process by setting a goal, like purchasing a car, saving for retirement, or funding for college education. You can choose the most suitable mutual fund scheme according to your goals.

Understand Your Risk Tolerance: Before choosing a fund, you have to understand risk tolerance. If you want high returns, you have to go for high-risk funds.

Research Fund Performance: Another significant factor to consider while choosing a SIP is researching the fund performance. Here, you can also seek help from an expert.

Check Expense Ratio: Check the fund’s expenditure ratio which includes management fees and other additional costs. A fund with a lower expense ratio can boost your overall return.

Conclusion

A Systematic Investment Plan or SIP is an excellent tool to start your investment journey and achieve long-term financial goals. SIP offers an effective way to build wealth over time with the power of compounding and leveraging rupee cost averaging.

FAQs

Q: What are the top benefits of choosing SIP?

There are several benefits of choosing SIP such as disciplined investment, professional fund manager, long-term wealth creation, rupee cost averaging, power of compounding, and more.

Q: Can I start investing with a ₹1,000 SIP?

Yes, you can start your mutual fund investment with a ₹1,000 SIP. Some schemes also allow individuals to invest ₹100 SIP.

Q: Can I increase my SIP amount?

Yes, you can increase your systematic investment plan amount with the top-up SIP method. Besides that, you can also choose flexible SIP to increase the investment amount.