Investment is a very important tool for generating wealth but for a beginner, it may seem daunting in the beginning. Stocks and bonds along with mutual funds, ETFs, etc., leave new investors feeling overwhelmed. Varied from many other investing strategies, SIP stands out as the most beginner-friendly investment strategy.
In this article, we discuss what an SIP is, how it works, and why it is a great investment option for newbies.
What Is SIP?
Systematic Investment Plan (SIP) is quite a systematic method of investing in mutual funds for a time period. An SIP is a method where you invest a fixed sum every single time (either monthly or quarterly ) into the mutual fund of your choice. It is automatically deducted every month or quarter from your bank account and then invested into the mutual fund scheme, making it hassle-free and very convenient to create wealth over time.
Investing lump sums means you put a large amount of money all at once; however, an SIP lets you trap in small investment amounts at regular intervals. For example, you can decide to contribute ₹1000 every month to a mutual fund. Eventually, your contributions will compound and grow with the magic of compounding.
How does SIP work?
SIP splits the entirety of a huge investment into smaller and manageable parts. Every time you make an SIP payment, your contribution buys mutual fund units, and those units get valued at the current market value or net asset value (NAV). The NAV of mutual funds varies every day because it depends on the performance of the assets within the fund, thus resulting in a different number of units each time you make a contribution.
Here is a general overview of how SIP functions as follows:
Selection of fund:
You have to choose the particular mutual fund scheme that meets your expectations from within. The fund may be based on equity, debt, or a hybrid of both. It meets the parameters of investment horizon, risk, and monetary goals.
Amount Determined:
Decide how much you want to invest every month. It can be as low as ₹500 or as high as several lakhs depending on affordability.
Automatic deduction:
You set up a monthly investment SIP, wherein this amount would automatically be deducted from your bank account on a fixed date of every month and invested in the selected mutual fund.
Compounding over time:
You will have invested more regularly, thus increasing wealth potential. Gradually, this would give an impact, where your initial investment is returned as well as its accumulated returns.
Benefits of SIP for Beginners
1. Affordability and Accessibility
SIP has something most beginners would want-the affordability. All you need is to save enough money, and you can get started. Many mutual funds accept SIPs, starting from as low as ₹500 a month. That makes it reachable to almost any investor with a limited budget. Lower the entry point for beginners who don’t have much savings to begin with.
2. Average Cost in Rupees
SIP also gives you rupee cost averaging. You make monthly investments of a fixed sum, meaning you purchase more units with less money when the price is low as against fewer units when the price is high. Once depreciated, this cost average brings down your investment over the long term, minimizing effects of market volatility. Ultimately, this shall lead to a lower average unit cost over time.
3. Discipline and Consistency.
Lack of Commitment: For most new investors, it becomes difficult to plan for investments and find the right action that will help them become consistent in investing.
4. Power from Compounding
Magic compound makes even the little pennies you accumulate over a month and somehow turn it into blinding amounts at the end. As you are reinvesting from your earnings (capital gains, dividends, etc.) back into the fund, this most noteworthy point at which you are earning on return, return follows. All this grows exponentially and is really very rewarding when one invests early and waits for long. SIPs are a beginner’s best friend in leveraging the benefits of compounding without having to check or manage the investment regularly.
5. Chance to Avoid Timing the Markets
Oftentimes, the hardest thing an investor can do is timing the market. Some of the questions a beginner usually asks him-or-herself are whether it is the time to buy or sell. The second question is particularly important since it is a matter of fearing doing something incorrectly. The SIP is not dependent on timing but invests continuously, with market ups and downs. So, there will be no hassle whether the market peaks or troughs since his investment can grow with the time that he devotes imagining what will fit into his long-term goals.
6. Diversification
Diversification, one of the key Investment principles, spreads the risk. The small investor in Mutual Funds through SIP can now afford a diversified portfolio of Stocks, Bonds, and other assets: It was time when the investors couldn’t diversify their portfolio because they didn’t have enough money to buy these assets. If one sector or asset class does not perform well, then the other sectors/asset classes present in the mutual fund may do well enough to balance your overall returns.
7. Flexibility and Liquidity
SIPs are the very flexible kind of investment, as it provides to the investor a choice of amount and frequency of the contribution: monthly, quarterly, etc. SIP also allows redemption of the units at any point of the specified period, making this a great liquidity investment. So if you ever need that cash to go quickly for an emergency, just sell your units and retrieve it.
Here is all about why beginners need to use SIP.
Start Small, Increase Growth:
It is a common belief among different beginners that they don’t have the money to invest in something. With the SIP, you can invest a small amount at first and go on adding more with increasing financial time. Thus, you do not need to feel and make wealth without sweat feeling.
Mitigate the Risk:
SIP is a good option for beginners who are scared of market dips. Since markets move in cycles, it would help for SIPs to smooth out the effects of short-term volatility. In this case, your strategy stands consistent even though the market is volatile.
The SIP option becomes a great learning experience in investment for the beginner about the stock market and how to get used to spending money for investment in mutual funds over time to grow financially while learning and understanding better different financial markets.
Conclusion
SIPs are the total best investment options a beginner would opt for when it comes to kick-starting investments without great discipline and lots of funds upfront. Thus, SIP builds wealth over time by paying out compounding, rupee cost averaging, and consistency, all with the dual-edged sword of minimizing the chances of risk due to market fluctuations. Whether you save for a goal as big as retirement, your child’s education, or simply want to build wealth, SIP could offer you an assured, long-term investment strategy.
If you are new to the investment world, SIP is the most simple, efficient, and low-risk way to start being an investor. So, here is the first step towards your better future investing through an SIP, now!