Systematic Investment Planning (SIP)
The two methods of investing in mutual funds are invest once and the second one is SIP, an acronym for Systematic Investment Plan.
Most of the people who invest in mutual funds don't know the actual benefits of the Systematic Investment Planning and are tend to invest the available money at one go. However, Instead of investing at a time, if we will invest the same amount in a Systematic way we will have the following benefits.
It is proven that in most of the cases, your money will grow more in SIP method than in investing at one time.
- Also, the risk of investing in the stock markets reduced by using this method.
Now how you will override the risk of investing in equities? Again simple. The profits from investment made at lower prices will balance the losses incur from the investment made at higher prices. Take for example of current market environment where the world markets are in recession. Most of the stocks, the small and mid caps or even large caps, have lost their stock prices ranging from 50% to 95%. If you are not lucky enough and invested in a stock which lost 95%, you would have left with 5% of your investment. But if you followed the SIP method and invest, you may not lost more than 40%-50%. This is true not only with the stocks but also with the mutual funds. After all, mutual funds invest in stocks only, though the percentage of the total amount varies between stock to stock.
However, if you are lucky enough and invested in a stock which is strong enough to sustain such a recession environment, you would have beaten the SIP method. But how much confidently you can say that whatever the stock you choose will be one of such stock?
Investing in SIP method doesn't mean that you have to invest only in mutual funds. You can follow SIP method even with the stocks as well, however you have to take care of choosing the stocks and placing the orders on time regularly. Some of the brokers like Sharekhan are providing the SIP for stocks. All you have to select the stock which you want to invest, the amount and date of placing the order. And you have to keep required amount in your account on the date of placing the order.
The last but not the least, the exit point which we chose to stop investment is critical in SIP. If you start investing in SIP when the market is at peak and stopped when it is at rock bottom, you will have to wait for many years to recover your capital. Where as if you continue investing, you can recover your capital in very few days/years.
At the exit point if the markets are doing excellent and the fund is at its peaks then our investment returns are more otherwise we may get moderate profits or may be small amounts of losses also possible, but they are having minimal chance.At the same time, we can minimize the effect of volatility of the equity market using SIP. Since we invest in ups as well as downs the profits and losses are balanced and we can have the chance of getting good returns. This method is more preferable for all those who wanted the good returns and at the same time low risk.
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