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Understanding the Power of Systematic Investment Plan

Understanding the Power of Systematic Investment Plan

25-year-old Abhay found himself in a predicament. He was only a few months into his first job, and a major portion of his paycheck went towards meeting his recurring expenses like rent, utilities, and EMIs. At the end of each month, Abhay had around Rs. 2,000, which was enough to save up, but not enough to invest. Or so he thought, until a friend at work told him about an easy way to invest in mutual funds with whatever he could save up each month.

Abhay discovered that this rewarding investment strategy was known as a Systematic Investment Plan (SIP). It seemed promising, but being conscientious and methodical, he decided to read up a little more about SIPs and understand the power of a Systematic Investment Plan before adopting that strategy. Let’s take a look at what he discovered.

What is a Systematic Investment Plan?

SIP is an investment strategy where you invest a fixed sum of money at regular intervals, similar to a recurring deposit scheme. Generally, most Systematic Investment Plans are associated with investment in mutual funds. An SIP can therefore be used to invest in debt funds, equity funds, and hybrid funds as well.

One of the main reasons why Systematic Investment Plans are rising in popularity is that they are extremely customizable. Right from the amount of money that you invest to the period as well as the frequency of investment, every aspect of the plan can be customized according to your needs. You can take into account various factors like your investment budget, your long-term goals, and your risk profile before starting your SIP. If you’re a new investor, you’ll find the Moneyfy app from Tata Capital from easy to use. Setting up an SIP on the Moneyfy app is also smooth and straightforward, thanks to the crisp and fuss-free user-interface.

In Abhay’s case, he started his SIP considering his investment budget, which came up to Rs. 2,000 each month. Over the course of 1 year, he succeeded in growing his investments by around 10%, which was more than what he would have earned by merely saving up. Like Abhay, you too can reap rich rewards in the long-term using a proper Systematic Investment Plan.

What makes a Systematic Investment Plan so powerful?

The power of a Systematic Investment Plan lies in the fact that it utilizes the concept of rupee cost averaging. Let's take a brief look at this concept to better understand the full power of a Systematic Investment Plan.

Additional Read:- Is ELSS a Wealth Creation & Tax-Saving Tool?

What is rupee cost averaging?

When you invest in mutual funds, you can either choose to park a lump sum amount in the fund of your choice at one go, or you can adopt an SIP, where you invest a fixed sum at periodic intervals regularly. When you opt for the lump sum investment option, your cost remains fixed at whatever price you purchase the mutual fund units. However, when you opt for an SIP, you ultimately reduce the cost of your investment considerably.

For instance, let’s assume you make a lump sum investment of Rs. 10,000 in a mutual fund scheme whose NAV is Rs. 20. The number of mutual fund units that you can get with that lump sum investment is 500, with the per unit cost being Rs. 20.

However, here’s what Abhay did when he adopted a Systematic Investment Plan, wherein he invested Rs. 2,000 each month. Let’s take a look at the first 5 months of his investment plan.

  Investment amount (Rs.) NAV (Rs.) Number of mutual fund units
Month 1 2000 20 100
Month 2 2000 25 80
Month 3 2000 16 125
Month 4 2000 16 125
Month 5 2000 20 100
Total number of mutual fund units purchased in 5 months 530
Cost of each mutual fund unit:  
(Total investment amount divided by the total number of units)
Rs. 18.87

As you can see, Abhay’s SIP easily brought down the cost per unit to Rs. 18.87, which is less than the cost he would have incurred using a lump sum strategy. This is because he got to purchase more mutual fund units at different NAVs each month.

Other benefits of a Systematic Investment Plan

The power of a Systematic Investment Plan is not limited to rupee cost averaging alone. Here are some other benefits that you can reap by implementing such an investment strategy.

  • An SIP helps you adopt a disciplined investment approach and strategy.
  • It eliminates the need to time the market.
  • It’s one of the easiest investment strategies to execute.
  • An SIP benefits you in the long-term.
  • It provides an additional benefit for investors who start early.
  • It considerably reduces market risk and the effects of market volatility.
  • It also allows you to fully utilize the power of compounding for higher returns. 

Additional Read:- SWP- Your Solution for Systematic Withdrawal

Conclusion

All things considered, the SIP option is one of the easiest and most convenient investment strategies for new investors who wish to start small. It’s also highly useful for people who do not have a lump sum amount to invest in one go. If you’re just venturing into the world of mutual funds, consider adopting this strategy. Like Abhay, you too could find its benefits very useful. To get started, download the Moneyfy mutual fund app, which makes mutual fund investments easy and seamless. You can start your SIP using the app itself, and by investing regularly in a disciplined manner, you can meet your financial goals without any trouble.

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