When it comes to financial planning, only a less number of people endeavour to give thoughts to such a venture.
Else, everyone is busy making ends meet or spending their income.
But, stop for a minute and think about your plans for your old age.
Do you plan on depending on your kids? And what is the surety of them actually supporting you to the end?
A person should take better care of their future and plan things in the way.
Investing is the most appropriate choice for such financial planning.
Now you must be wondering that how can a middle-class person with an average salary step into investing.
Hear me out, gone are the days when you needed the bulk of the fund to invest in mutual fund or stocks. A person does not necessarily need a lump sump amount for the purpose.
Earlier, the transactions were made in one payment which made it a luxury for average people to conduct such investment.
The introduction of Systematic Investment Plan by Franklin Templeton Mutual Fund in India in 1993 has brought revolution in the field of investment.
People with average income could invest in a mutual fund and make their dreams come true.
Today, SIP has become a popular choice among investors who wish to make good returns eventually and do not have the luxury of bulk money to spare.
Also Read: Secure Loan vs Unsecure Loan, What’s the difference?
What is SIP?
Let us understand the concept of SIP with an example.
Suppose you have a monthly salary of 30000. You plan on investing 150000 in a mutual fund to secure your future.
But would that be possible with the present salary? No.
So instead of investing a lump sump amount of 150000 in MF, you can choose an SIP.
By choosing SIP, you will be able to invest as low as 100 per month. You can decide on the monthly investment amount on your own.
You can even decide on how long you want to keep investing. However, an ideal investing amount for the present generation is 20% of their income. This way you will save more and earn more.
SIP is an ideal investing strategy because it lets the investor have the freedom of choice. You can enter an SIP or exit it at any time without the worry of any exit load or fine.
A person can even save tax as high as 150000 in mutual fund in ELSS via SIP investing.
You can minimize or maximize your SIP amount according to your convenience.
Here are some features of SIP to help you understand the benefits of this investing strategy
If a person invested 1000 rupees in mutual fund 20 years ago and if he/ she had a good investing habit, they must have accrued a corpus of over a crore today.
This happens due to the effect of compounding.
Let us understand this effect.
When you invest in SIP, it gives you return. Since you are investing on monthly basis, the return accrued in monthly as well.
This return is automatically added to your investment amount. And then this amount is invested back again into the units.
This creates a cycle of investment. If this process is carried on for a long time, it yields a massive corpus to the investor.
Since SIP lets you invest in a mutual fund according to your convenient amount which can be as low as 100, it is minimalist investing.
The versatility lets you make amendments in your investing amount. You can increase or decrease it at anytime.
Rupee cost method
When the market is suffering inflammation, you buy fewer units of stocks in the market and when the price is low, you automatically buy more units of these stocks.
This helps you maintain your fund balance in volatility.
A good investing habit yield good return.
SIP helps you create a discipline routine of investment. This works on “save first spend next” method.
SIP extracts the monthly amount fixed by you on the transaction dates.
This makes sure that you are investing regularly. In fact, set this transaction date next to your salary date.
This will make sure that you are saving your money before spending it.
SIP helps you absorb market risks.
When there is a bad market condition, the investors using the lump sump strategy suffer a considerable wave of risks.
However, SIP is less affected by such volatile nature of the market. The rupee cost method helps the investor make up for the upcoming loss.
The Bottom Line
A person should choose their investing strategy based on certain parameters.
If you have a good risk appetite, lump sump or STP investing can be ideal for you.
If you do not favour risk much, SIP is the best option for you.
Likewise, the parameter of return, fund, and affordability is important as well.
Not everyone can afford to invest a bulk amount in the mutual fund.
So, SIP automatically becomes an ideal choice for them.