What Is Systematic Investment Plan (SIP) & Why It Is a Great Strategy for Young Investors

When we speak of “Investing”, do you picture a 100-meter race? If your answer is yes, then you are mistaken. On the contrary, investing is like a slow marathon. It requires commitment & patience over a long time to reap the benefits of a decent corpus for your financial goals.

And this is all the truer for equity, which is the most preferred route if you want to grow your wealth & gain financial freedom. However, the sad fact is that many young investors don’t get to participate in this because they don’t know how to manage the short-term volatility in equity investment.

Enter Systematic Investment Plan. This post will share with you 3 cool reasons why Systematic Investment Plan (SIP) is an excellent strategy for young investors.

How SIP works

Investing a fixed amount every month gets you a higher number of units when markets are low & a lesser number of units when the markets are low. Over time, this helps average out your total cost of investment. Let us understand this with the help of an example:

Prashant chose to invest INR 10,000 in an equity mutual fund via SIP. Details of his investment and the units allotted are given below.

Month Amount Invested Unit price at the time of investment No. of Units you get
January 10,000 110 90.91
February 10,000 115 86.96
March 10,000 125 80.00
April 10,000 135 74.07
May 10,000 150 66.67
June 10,000 155 64.52
July  10,000 140 71.43
August 10,000 132 75.76
September  10,000 120 83.33
October 10,000 117 85.47
November  10,000 115 86.96
December 10,000 110 90.91
Total 1,20,000 956.98

You can see that the NAV has moved from a low of 110 to a high of 155. This is in line with the market direction which rose during January – June & came down from July onwards.

However, due to regular investment of a fixed amount every month, Prashant’s average cost per unit is INR 10,000/956.98 = INR 125.39

This is called rupee cost averaging.

Reasons why SIP is a cool strategy for a young investor

Now let us look at the different ways that SIP is helpful for a young investor.

Reason # 1: Reduces the overall cost of investment:

One of the significant factors that influence your return on investment is the cost. As we saw in the previous example, regular investment of a fixed amount helped Prashant reduce his investment cost. This directly goes towards increasing the returns.

Reason # 2: Helps you to NOT time the market:

Do you want to know the top reason why equity investors don’t make money?

It is because they try to TIME the market. In other words, waiting for the markets to hit bottom to buy: & waiting for the markets to hit a high to sell. The sad truth is this: To date, there is no algorithm to predict the high/low levels of the market. The reason is that you cannot predict the behaviour of lacs of investors.

SIP ensures that you continue your investment without bothering about market levels. This helps you to earn a decent return. And the goal of earning that return is not to become rich overnight but to meet your financial goals.

Reason # 3: Instills saving discipline:

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” – Aristotle

We can only achieve financial freedom if we train our subconscious mind to make saving & investing a regular habit. Habits are created not by a one-off action but by repetition. SIP is a repetition that helps you program yourself & get into a saving habit. Once you imbibe that habit, then savings become second nature to you.

With every monthly SIP, you also get peace of mind that you have done your duty & are moving towards your goal of a secure financial future. And that is priceless, isn’t it?

Tips on doing SIP effectively

Hopefully, by now, we’ve convinced you a bit about how SIP can benefit a young investor like you. But we want to go one step ahead & make sure it really works out for you really well. Hence check out the below tips:

  • SIP does not mean you don’t ignore proper research in selecting the suitable mutual fund scheme for your financial goals. So, make sure your chosen schemes are the right ones.
  • Try to diversify your investment by breaking your monthly SIP amount into 2-3 schemes.
  • Rather than opting for a perpetual SIP, try to do SIP for a fixed number of months or ideally a year. This will help you to do a periodic evaluation of scheme performance.
  • Prefer giving SIP instruction at the start of the month. This will help you know how much is left to spend in that month & reduce the chances of your standing instruction getting bounced due to insufficient funds.
  • Once you do SIP, DO NOT track markets. Invest your time in better things.
  • Don’t forget to increase the SIP amount with each increase in income.
  • In case you receive a windfall or lumpsum money, invest first in a liquid fund & then execute a Systematic Transfer Plan (STP) from that fund into 2-3 equity mutual funds

Conclusion:

SIP is an excellent option for young first-time investors to reduce their risk of investing in equity markets & get into a regular savings habit. To reap the full benefit of SIP, you need to invest in good mutual fund schemes & remain focused on continuing your SIP in volatile markets.

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