Systematic Investment Plan i.e. SIP is a popular means of investment in today's time. In today's time, the number of investors investing in mutual funds through SIP is increasing rapidly. But have you ever thought about why SIP is being liked so much? After all, how does SIP work and how does it create a big fund even from small deposits? Know about this here-
How does SIP work
SIP works like a Recurring Investment, in which a fixed amount is deducted from your account every month and invested in your favorite mutual fund. Mutual funds are market-linked schemes. After investing in MF, you get a certain number of units of that mutual fund scheme. How many units you will get from the invested amount depends on the Net Asset Value (NAV) of your scheme for that day.
How is profit made?
Suppose the NAV of a mutual fund i.e. Net Asset Value is Rs 20 and you invest Rs 1000 in that mutual fund, then you will be allotted 50 units. Now as the NAV of the mutual fund increases, your invested money will also increase. If the NAV of the mutual fund becomes Rs 35, then the value of your 50 units will increase from Rs 1000 to Rs 1750.
This is how you get the benefit of Rupee Cost Averaging
When you invest in mutual funds every month through SIP, you keep getting allotted units. When the market is bullish, you get fewer units allotted and when the market falls, you get more units for the same amount of investment. In this way, your investment is made at an average price. This is called Rupee Cost Averaging in the language of the market.
Benefit of compounding
In SIP, you get the benefit of compounding, that is, you get interest on the principal as well as the interest. With the benefit of compounding, your money grows rapidly and you get good profits. The average return of SIP is considered to be 12 percent. Sometimes it can be more than this. According to experts, SIP should be done for a long time, the longer it is done, the greater will be the benefit of compounding. However, keep in mind that the return of SIP depends on the market. Returns cannot be guaranteed in this.
Flexibility is also the investors' choice.
There is flexibility regarding the investment period and amount in investing through SIP. Investors do not get this flexibility in other schemes. You can choose the option of a monthly, quarterly, or half-yearly investment period at your convenience. Apart from this, whenever you need to, you can pause it and continue again from there. There is no lock-in period in this. You can withdraw money from your SIP anytime. Not only this, you can increase or decrease the amount of SIP anytime your wish. You can add top-up to it.
