Systematic Investment Plan (SIP) is one of those tools that are being used by investors a lot these days. And if you stick to this religiously it has the potential to generate huge corpus in long run. Thus it is important for investors to take full advantage of this tool right at the earliest.
This is not without reasons that this tool is gaining huge traction among investors and with this write-up we are going to describe those reasons only. However, investors need to remain conscious as there are many SIPs that are not worth investing money and you need to do a lot of research prior to investing your hard earned money. Nonetheless, SIPs could be of immense use if you start it right at the earliest and let’s go through the reasons of its popularity.
Compounding has Huge Benefits- One of the characteristics that make SIPs very popular “Compounding”. With each investment the value of your share increases thus enabling you to generate a huge corpus in long run. However, you need to be very punctual and disciplined with the investment. Missing deposits could make your investment ineffective and weak and thus if you are willing to be financially disciplined then only move ahead.
You can start with little money- Another property of an SIP is that you need not be a wealthy person to get started with it. Even middle class people with little income invest on it and this makes it so popular among investors. However, if you invest too little the reward will also be less so think before investing very less amount as it may hamper your overall goal.
Convenience- The advent of computers and internet has made things very handy and same goes true for investment. These days, people can invest through SIPs without getting into the hassle of paper works and without having to stay in a queue. You have to just submit cheques along with the filled up enrolment form. The mutual fund will deposit the cheques on the requested date and credit the units to one's account and will send the confirmation for the same.
Currency cost averaging- Currency cost averaging is another factor that makes SIPs so popular among investors and individuals. When you invest the same amount in a fund at regular intervals over time, you buy more units when the price is lower. Thus, you would reduce your average cost per share over time. This strategy is called 'currency cost averaging'. With a sensible and long-term investment approach, currency cost averaging can smoothen out the market's ups and downs and reduce the risks of investing in volatile markets.
David Birnbaum is an EVP, New York Business Unit at Sandata Technologies and has worked in various capacities like Business Development Executives and has helped companies invest in various financial products.