InvestorQ : What are SIPs? Why are they so popular?
Deepali Khupte made post

What are SIPs? Why are they so popular?

Monali Shah answered.
4 years ago

A SIP or a systematic invest plan is one of the smartest and easiest way to invest money in the stock market via mutual funds. SIPs help you create wealth, by investing small amounts of money (even as small as Rs. 500) at specific intervals over a period of time.

SIPs are not only a planned and disciplined approach towards investing, but they also inculcate the habit of saving in an investor. Young adults are now finding it easy to invest small sums of their salaries in the equity market. By investing early, they can make the most of the twin benefits of rupee cost averaging and the power of compounding.

Rupee cost averaging:

This approach is applicable when an investor invests a fixed amount of money regularly. The units of mutual funds that are credited to an investor’s account vary based on the then market level. This means, if your SIP date falls on a day when the market is falling, then you will get more units of the mutual fund. Thus, an inverse connection exists between number of units and the market level.

Power of compounding:

The value of an asset or investment compounds if it is able to generate earnings, which can then be reinvested to generate more earnings. By investing in the equity market early an investor can benefit from the power of compounding, which is also called the eighth wonder of the world.

When you buy a mutual fund or invest in an SIP, compounding allows you to earn profits on both the principal as well as the profits earned on existing principal amount that you have reinvested in the market. This helps an investor build a large corpus even with humble beginnings.

In an SIP, you can buy the units of a mutual fund on a predefined date every month. This helps an investor handle his/her day-to-day expenses while allowing for easy investments. You can use SIPs for your various goals in life such as a new car, to fund your child’s education, a trip abroad, retirement corpus, etc.