Understanding How SIPs Work: A Smarter Way to Invest

Investing your hard-earned money wisely is crucial for financial security and growth. One way to achieve this is through Systematic Investment Plans, commonly known as SIPs.  In this blog, we will dive deep into SIPs, discussing what they are, how they work, when to invest in them, their benefits and why they should be on your investment radar.

 

What is an SIP?

A Systematic Investment Plan (SIP) is a disciplined way to invest in mutual funds. It allows investors to contribute a fixed amount of money at regular intervals (typically monthly) into a selected mutual fund scheme.

What's great is that you can start with as little as ₹500, making it an option for almost everyone.

SIPs are designed to make investing accessible and affordable for everyone, regardless of their financial capacity.

How SIPs Work to Your Long-Term Benefit?

SIPs work wonders on your portfolio with the simple concept of rupee cost averaging.

Rupee Cost Averaging 

SIPs enable you to buy more units when prices are low and fewer units when prices are high. Over time, this strategy can lower your average purchase price, reducing the impact of market volatility.

For example : Suppose you invest Rs 12,000 every month.

When the NAV is Rs 24, you will receive 500 units because Rs 12,000/24 = 500.

However, if the market experiences a downturn, causing the NAV to drop to Rs 20, you will acquire 600 units, Rs 12,000/20 = 600.

Month	Investment (Rs)	NAV (Rs)	Units Acquired
1	12,000	24	500
2	12,000	24	500
3	12,000	20	600
4	12,000	20	600

This demonstrates how you acquire more units when the market is at a lower level, thanks to rupee cost averaging.

Advantages of Mutual Fund SIPs

Now that you understand how SIPs work, let's explore the benefits of this investment strategy.

1. Savings In A Disciplined Way: SIPs are the most disciplined way of investing. When a person invests through a systematic investment plan, they commit to saving regularly to invest. Each installment is geared toward achieving their desired financial objectives.

2. Flexibility: While it's essential to invest for the long term to maximize returns, it's not compulsory. You can choose to quit or discontinue the investment as and when you want. Additionally, you can decrease or increase the investment amount depending on your cash flow, which is enabled by different types of SIPs:

a. Top-up SIP: Allows you to periodically increase your SIP investment amount, helping you accelerate your wealth creation.

b. Flexible SIP: Offers the flexibility to change your SIP amount or pause it temporarily to align with your changing financial situation.

c. Perpetual SIP: Continues indefinitely until you decide to stop it, making it suitable for long-term financial goals.

This serves as a very flexible and feasible investing strategy for working professionals who don't have the pressure to wait for a lump sum to invest in any asset.

3. Enables you to start early: Getting a head start on your mutual fund investments through SIPs with even small amounts can make a big difference. The earlier you begin, the more time your money has to grow.Compounding is the snowball effect where your initial investments earn returns, and those returns, in turn, generate more returns.

This extra time can significantly boost your returns because you not only earn on your initial investments but also on the returns from previous periods.

4. Professional Management: Mutual fund managers make investment decisions on your behalf, leveraging their expertise to maximize returns.

5. Diversification: Mutual funds pool money from multiple investors and invest in a diversified portfolio of assets, reducing the risk associated with individual stock or bond investments.

6. Taxation: When you invest through SIPs, the units you buy are redeemed on a first-in-first-out basis. If you redeem your investment after one year, the units you bought first count as long-term capital gains. They're tax-free if they're less than Rs 1 lakh. 

But units bought after the first month result in short-term capital gains, which are taxed at a flat rate of 15%, with additional cess and surcharge as applicable

Although the initial calculations for SIPs may appear daunting, with the right guidance, regular calculations can prove worthwhile for your investment strategy.

Cambridge Wealth sends daily updates to keep you well-informed about how each cost contributes to your portfolio's value. If any costs don't align with your investment goals, early awareness allows for effective risk mitigation. By entrusting these tasks to a research-backed team, you can simplify your financial management and focus on your core daily activities, knowing that your money is in capable hands.

In Conclusion

Mutual fund SIPs provide a straightforward and effective way to invest in the financial markets. They offer flexibility, accessibility, and the potential for wealth creation over the long term. Whether you're saving for retirement, a child's education, or any other financial goal, SIPs can help you achieve your objectives by harnessing the power of compounding and disciplined investing. All you need is the required knowledge and the potential to invest a particular amount at fixed intervals. Know how to select the right mutual fund tailored to your unique needs.