Investing is an action in which you allocate a portion (sometimes a significant portion) of your income to an investment scheme. This action is done with the intention of accumulating enough wealth for the future when you opt to quit your career. One of the ways you can earn extra income through fund allocation is by investing in mutual funds. But just choosing a mutual fund scheme is not enough. After deciding on a mutual fund scheme, you also need to think about the mode of investment. There are two modes of investment. Those two modes are lump-sum investments and systematic investment plans. In lump-sum investment plans, you are required to make a one-time investment. Systematic investment plans or SIPs are pretty different from that.
What are SIPs?
As stated earlier, in terms of nature and function, an SIP is different from the lump-sum investment mode. These plans are an investment mode through which a fixed amount is deducted from an investor’s bank account on regular basis (monthly deductions being the most common). This mode of payment ensures that the pressure of arranging the funds for a lump-sum investment does not fall on you. Moreover, systematic investment plans ensure that they don’t end up burning a hole in the investor’s pocket. Under SIPs, to pay for the mutual fund scheme you can leave a standing instruction with the bank that could enable automatic deductions from your savings bank account at regular intervals specified by you. Thus, if you ever forgot the payment date, this feature ensures that a mutual funds investment goes through smoothly.
There are numerous reasons why you need to consider choosing the SIP route over the lump-sum one and one of the many reasons is that the SIPs are known for paying off higher returns in the long term. They also come with the guarantee of substantial growth in investments. Likewise, SIPs as a mode of mutual funds investment are regarded as a balanced investment choice. More than one unit is purchased whenever the price is low. Conversely, fewer units are bought as the price goes higher and higher. Therefore, as time goes by, the cost is lower than the actual cost. These plans are considered a smart choice for investors who seek a deduction on their income tax returns.
Why they became popular?
Here are some of the reasons why SIPs have become popular over the years:
- They are known for being convenient:
One of the major advantages of SIPs is that they are very easy to understand and use. These SIPs are known for not coming up with many terms and conditions. It is also easy to register for SIP online, which is also a fast and hassle-free process. Usually, a SIP application is validated by officials in approximately three weeks. After that, you get free access to your mutual fund portfolio. Investors who are new to investing in mutual funds may also consider the transparency offered by this investment mode and thus start with it easily. All that’s required on an investor’s part is to choose one among the different mutual fund variants. Once that’s done, leave a standing instruction with the bank for an auto-debit.
- These plans are suitable for conservative investors:
Systematic investment plans are suited for investors that aim to accumulate greater returns in the long term. However, while they want to acquire wealth, they also want to avoid the risks associated with the market. All that an investor is required to do is pay small amounts regularly. Hence, if opted for SIPs, you don’t need to worry about the budget. Even if you don’t have a regular source of income, you could opt for SIPs. All that’s required on your part is, to determine your monthly investments is to use the SIP calculator.
- SIPs are not a drain on the wallet:
Unlike lump-sum investments, where you are required to make a payment at once, with these plans, you can make regular payments. That’s why SIPs are very light on the wallet.
These benefits above have made the SIP today totally synonymous with mutual fund investing.