SIP Pro and cons
WHAT IS AN SIP?
Systematic Investment Plan (SIP) is a method of investing in mutual funds wherein an investor chooses a mutual fund scheme and invests a fixed amount of his choice at fixed intervals. SIP investment plan is about investing a small amount over time rather than investing one-time huge amount, resulting in a higher return.
HOW DOES AN SIP WORK?
Through SIPs you can invest in any kind of mutual fund, which helps you create wealth over the long term based on your future goals. Here, generating returns and creating wealth is not the same thing. Investing in fixed deposits only helps you in generating returns. But if you want to create wealth, you can invest in SIP mutual funds. And this amount is automatically deducted from your bank account at the intervals you choose to invest.
WHEN TO INVEST IN AN SIP?
SIP can be started at anytime ensuring minimum risk with the correct suitable scheme plan for the investor. It is very important for the investor to choose the scheme which suits his long-term goals well. Hence, there is no suitable time frame within which an investor should start an SIP, as they say the right time to start investing was yesterday.
PROS OF AN SIP
- Makes you a disciplined investor
- Mitigates your risk or in a technical way the rupee cost averaging factor, i e averaging your cost to make sure you buy more units at a lower price
- Power of compounding
- Hassle free and flexible plans to invest
- Generation of wealth over long period of time
CONS OF AN SIP
- Unsuitable for irregular income flow, for example a free lancer
- Uniform investment through ups and downs. This keeps the investor from taking advantage of the upswings.
- Insufficient funds, if an investor fails to maintain adequate balance in the bank on the day of debit of SIP, the PDC or ECS, as opted, will return dishonoured. This means that the investment will not happen that month.
The above is an example of how an SIP helps you create wealth.
Assumptions
- Rs 10,000/- Per month, total investment sum of Rs 24,00,000/- .
- Return of 10% per annum is assumed
- Period of 20 years has been considered