What is SIP?



What is SIP?

The full form of SIP is systematic investment plan and it involves the investment of money on a periodic basis. You can invest your money weekly, monthly or quarterly as per your convenience. SIP helps in developing investing habit so you can generate a good amount of money as time passes by. The investment can be done in various avenues including gold ETFs, equity funds or debt mutual funds.

The money you gain in the initial years is less as you don't have enough accumulated money but as time passes by the power of compounding comes into place. You will notice that the returns keep on increasing substantially in later years. The following table can be taken as an example.


In the above table, we have assumed that a person invests Rs.10000 per month for an annual return of 15 percent and continues to do so until 35 years. You will notice that in later years the returns generated are in crores. Here the total amount invested is only 42 lakhs but the return generated is 14.9 crores. This is called the power of compounding. It is advisable that you start at an early stage so you can be financially free at crucial times. (Education, Car, House, Marriage)

The risk factor in SIP is reduced due to the concept of rupee cost averaging. Since you invest at a fixed date every month, the units of the funds purchased may sometimes be costly and sometimes not due to the stock market being extremely volatile. So on an average, you would not have invested all your money at the highest NAV. So when the market gains upward momentum you would end up at some gain. 

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Thanks for reading!
Please comment on any financial query you had like me to address. I will try to post something worthwhile. 

Coming up Next: How to invest through SIP?




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