It is indeed a great idea that mutual funds in India allow investors to invest a small amount (even Rs. 500) every month. This provides a great opportunity for many to participate in the Mutual Funds even without having a large sum to invest. By facilitating such investors, the Mutual Funds have helped the investor, the MF industry as a whole and the country.
Let us see from the individual’s point of view, how the Systematic Investment Plan (SIP) is very useful:
- First of all, the individual is able to participate in the Stock Market (though indirectly) without having a large sum and expertise.
- Regular investment gives an automatic discipline in saving and investing in the short term and wealth accumulation in the long term.
- Thirdly, the individual can also get income tax deduction, if he chooses to invest in Equity Linked Saving Schemes (ELSS).
- Most importantly, the concept of Rupee cost averaging helps the investor to invest without bothering about the timing of the investments. This point requires a little elaboration. Because only a fixed amount is invested, it automatically buys fewer units when the market is high and buys more units when the market is low. This may appear very simple but results in lower cost per unit. Thus, for the investor SIP is an automatic tool of Risk Management.
- Because, SIP results in lower cost per unit, the Return on Investment (ROI) for the investor is higher as compared to bulk investment.
In many respects, the SIP falls in line with our ‘simple and happy’ approach to Personal Finance! Of course, the real benefit of the concept of SIP accrues when the period of investing is over a longer time horizon. You need not be smart but need patience. I am looking forward to hearing your success stories in using this concept in the Path to Prosperity!
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