When it comes to investing in the market there are two modes that one can choose. One is through a lump-sum payment, a method which is referred to as a lump-sum investment. The other method is through a SIP, which is also referred to as a systematic investment plan. Both methods are used to invest in mutual funds and their different variants.
What is SIP?
A facility offered by mutual fund schemes, in systematic investment plans, you can opt to allocate funds at regular intervals to a mutual fund scheme of your choice. Also, in case there is an insufficient balance in your bank account, the SIP instalment will not go through and there is no penalty charged to you for non-payment.
How does it work?
As stated earlier, unlike lumpsum investments, SIPs are monthly payments. For payments, you can request the bank to enable automatic deductions of a fixed amount from your savings bank account at regular intervals (the most common example being monthly) specified by you. This feature ensures that a mutual funds investment goes through even if you were to forget the date.
What are the merits of opting for SIPs?
Here are some of the common benefits that are associated with systematic investment plans:
- SIPs are light on the wallet:
One of the ways a systematic investment plan differentiates itself from a lump-sum investment is that in SIPs, the amount is deducted from your bank account every month. Lump-sum investments make sense only if you have the investment amount at your disposal. However, if you don’t possess the said amount, it will be a sensible decision on your part to opt for an SIP investment.
- They are affordable:
Apart from not being a burden on the wallet, SIPs also make sure that you don’t burn through it either. To invest in mutual funds through a SIP, you don’t need to accumulate a large sum of money. In SIPs, it is possible to start investing in mutual fund schemes with a small amount.
- These plans are flexible:
When you opt for a SIP, you also get to choose things like the amount you would like to invest and the duration for which you would like to keep investing. Apart from that, SIPs are also known for having things like the option to increase or decrease the investment amount, pausing it, or even stopping it. This makes SIPs very flexible.
- There is also the power of compounding:
Another advantage of allocating funds to SIP is that it allows you to enjoy the benefits associated with the feature referred to as compounding. It is a feature through which you earn interest upon interest as it is added to the original amount. This feature is very beneficial for long-term wealth creation.
How does SIP work for you in any life stage?
Here’s how a systematic investment plan works for you during the different stages of your life:
- Nascent career stage:
The first 7 to 10 years of your career fall under the nascent or early career stage. If you happen to be in this stage of life, you need to think hard and clearly about your long-term financial goals. While it is wise if you were to start investing, it is important to make note of the fact that it is not too early to start investing because the earlier you start investing, the better it is in terms of wealth creation. Starting SIPs at this stage will also mold you into a financially responsible investor, something that will help you in the future. As Warren Buffett put forth eloquently, “Do not save what is left after spending; instead spend what is left after saving.” Take this advice to your heart.
- Career building stage:
The early 30s to your 50 years fall under this category referred to as the career-building stage. During this period, you are most likely married and, also may have started a family. Once the kids start going to school, you also need to start thinking about things like their higher education and even career aspirations. Higher education is regarded as one of the most important life-stage goals for many investors. However, the fees for higher education are increasing at a rate much faster than the average inflation rate. Hence, you need to start planning for your child’s higher education from an early stage of their lives. If you were to start your SIPs very early, with the power of compounding, by the time your child reaches the age of higher education, you end up accumulating funds for their education. Apart from the purpose of education, you can use the revenue earned during this stage for things like your child’s marriage or even their business ventures.
- Pre-retirement stage:
The period between your early 50s till the time of retirement fall under the purview of this stage. Even though you need to start retirement planning early, the primary focus in this stage of life should entirely be on retirement planning. As your income is highest at this stage of your career, and you are hopefully debt-free, it is possible to save a larger amount for retirement planning through your systematic investment plan. In case you are aiming to leave an estate for your loved ones, you can also choose to invest for wealth creation in your estate through SIPs.
Apart from the three stages above, you should also use your systematic investment plan to accumulate enough wealth that could serve as an exigency plan in case of health emergencies that could strike before or after your retirement.
