Systematic Investment Plan (SIP) is a financial plan that helps you to create wealth, by investing small amounts of money every month, over a period of time. A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors invest regularly in a disciplined manner, through small and periodic installments.
Why is SIP a Smart choice?
- Helps in ensuring financial discipline for us.
- Helps you prioritize investing above spending.
- Helps you invest at all prices getting an average low cost of investment
- Help you reduce your risk as costing becomes lower.
- Removes emotions for regular investing.
Let's say you invested Rs. 10000 every month and let's assume the mutual fund you invested in is available at a unit cost of Rs. 20 per unit. Then in 1st month , you will be able to buy 500 units. In the 2nd month , assume that the unit price goes down to Rs. 10 then you will be able to buy 1000 units. So total you could buy for 20000 is 1500 units, giving you an average cost of Rs. 15 per unit.
However, if you had invested a straight amount of Rs. 20000 in the first month when the unit price was Rs. 20 per unit, you would only have bought 1000 units at one price of Rs. 20.
Hence in the first case which is SIP, you average out your cost and thereby reduce risk resulting in generating better returns.
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