Building Wealth with Systematic Investment Plans (SIP)
Monday, Feb 12, 2024
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What is a Systematic Investment Plan (SIP)?
The term SIP refers to systematic investment planning which is a method to do mutual fund investments. In this way, you can make a fixed investment of a small amount on a monthly interval.
By doing it regularly over a certain period the investor can slowly build the portfolio by buying a particular fund or an investment.
How do SIPs work and their advantages?
It works on the principle of DCA which is dollar-cost-averaging. Where the same amount of money is periodically invested to buy the security regardless of the number of units and its price. Meaning, that when the prices are low, more units are purchased and when the prices are high, fewer units are purchased with the fixed capital that an investor periodically invests.
It essentially reduces the average cost of security by regularly purchasing the stock and avoids the hassle of emotional decision-making.
The payment is set automatically from your bank account towards investing in a mutual fund on one particular date in a month. On every investment made, certain units will be added to the investor’s account and altogether the number of units increases on every monthly investment made on the particular asset.
With a minimum of Rs 500, the investor can begin an investment through SIPs which gives the investor flexibility in beginning a wealth creation goal.
SIP vs. Lump Sum
A lump sum amount refers to investing the available capital that an investor chooses to invest in a fiscal year in one go rather than doing multiple payments. Let's look at SIP vs lump sum to understand the merits.
Benefits of SIP over lump-sum investments
There are several benefits of choosing SIP and here’s why:
Risk Mitigation
When an investor invests via SIP they can average the cost of the investment value. Thus during market fluctuations, it wouldn't impact the portfolio as much as it does from lump sum investment where the buying price of the particular asset is at different prices compared to buying several units at the same price.
Disregarding Perfect Timing
An investor need not look out for the right time to invest in the market. SIP as a system is meant to do regular investing which exhibits investing regardless of the timing while in the lump sum that will become a matter to decide.
Reacting Rationally
For any short-term fluctuations in the market, SIP investments need not worry as they tackle the emotional reactions with gradual and measured values.
Investing in Smaller Amounts
Those who don't have a huge corpus to invest at one shot can begin their journey towards investing with a small amount to consistently build the portfolio over time.
SIP Portfolio Diversification
A SIP investor can invest in many investment options as they choose to invest in smaller amounts periodically compared to a lump sum investor who prefers to invest with entire capital in one go-in-one investment option.
Industry Stats: 7.44 crore accounts of investors prefer SIP for regular investing as of Nov 2023
SIP Growth Statistics signifies the increasing popularity in India. According to the Association of Mutual Funds in India (AMFI), SIP inflows into mutual funds witnessed a surge from 523.73 lakh accounts in March 2022 to an active 635.99 lakh accounts in April 2023. The growth of over 20.5% in a year underscores the trust and reliance that Indians place on SIPs.
SIP Investment Strategies
Even while you prefer SIP as an investment method, here are a few strategies that can make it a successful one.
Creating SIP portfolio diversification
Be it any method of implementation, diversification must be incorporated into any portfolio and it's no different for SIPs. SIP portfolio diversification is complete with 3 pillars: Asset allocation, fund selection and sectoral allocation.
Your SIPs can be distributed to various assets such as equity, bonds and gold. This is essential to be prepared for any market conditions. During the bullish phase, equity can come to help and in a bearish phase, debt can bring stability to the portfolio.
Next comes the fund allocation, where an investor can pick from large-cap, mid-cap and small-cap funds in equities and debt funds in debts which can manage the risk profile if invested correctly. The performance of each fund house can be assessed beyond the past performance by considering the track record of the fund manager, their consistency in meeting the set objectives and also the expense ratio.
Lastly, the sectoral allocation, the market condition of each sector is different and it depends on growth and events in the sector hence sectoral allocation must be done dynamically.
SIP for long-term wealth creation
The depth of compounding can add value to the SIP investment in the long run, the longer the term, greater is the computing and it can add up to the returns.
For creating wealth through SIP an investor needs to disciplinely invest with their tolerance to slumps in the market. The system can average the cost by buying an asset at lower prices which in return gives more units that can improve the overall returns. This way an investor can methodically work on their goal of wealth creation by adjusting the SIP investment.
Apart from being consistent, it also needs careful reassessment periodically. Over time the SIP amounts can be increased upon salary hikes. Planning for tax efficiency plays a key role during hikes in salaries, investors can then plan on ELSS to receive tax benefits and to make greater returns. Ensure you revisit your SIP investment to see whether it aligns with your financial goal to make a purposeful investment and which adapts to the change in life events.
Industry Statistics: Growth of SIP investments in India over the past few years
SIP growth statistics projects as of the fiscal year 2016 - 17, the total amount collected through SIP stood at 43,921 crores and by the fiscal year 2023 - 24 it is at 1, 24,313 crores. That's a massive increase of 183% till November through SIP investments in India.
The Wrap
The maximum capacity of an investor’s portfolio can be achieved by SIP investment in India, if it's for wealth creation, it definitely is a choice. It's not just about investing and being done with it, it's also a matter of being cautious and interacting continuously with your goal and investments.
You know your goals, and investing is the only means to achieve it, SIP is one means to that wealth creation.
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