Systematic Investment Plan (SIP) is a systematic approach to investing in assets, allowing even small investors to participate. It allows investors to put a fixed amount of money into their chosen assets at regular intervals, regardless of market conditions. With SIP, you can start with as little as ₹10 (thanks to Navi Category Mutual Funds) and go up to more than ₹10,000 per month, week, or even daily.
SIP is particularly popular in mutual funds, offering flexibility and ease of investment. Among the various options, a monthly SIP is often considered the most advantageous, providing a balanced and steady growth over time. Whether you’re new to investing it is a very good option to start SIP. They offer a consistent investment habit, align well with most people’s monthly income cycles, and have been shown to yield significant long-term benefits.
Why SIP so popular?
Systematic Investment Plans (SIPs) have gained immense popularity in recent years, and for good reason. Many investors have reaped impressive returns from mutual funds using SIPs. This investment approach smooths out the highs and lows of the market, helping to mitigate risk. When the market dips, you buy more units at a lower price, and when it rises, the value of your investment grows significantly.
By carefully selecting the right mutual funds,
investors can achieve impressive returns, with some realizing an 18% XIRR
(Extended Internal Rate of Return) or CAGR (Compound Annual Growth Rate). SIPs
offer a reliable and effective method to capitalize on market fluctuations,
making them a favored choice among both new and experienced investors.
Can You Certainly Make Money Using SIPs?
Yes, it is possible to make money using Systematic Investment Plans (SIPs). The key lies in patience and consistency. By staying invested in mutual funds and continuing your SIPs, you can see substantial returns over time.
In a 5-year horizon, SIPs can generate good profits. Extending your investment period to 10 or 15 years can help you accumulate significant wealth, because of the power of compounding. This is the true strength of SIPs: the longer you stay invested, the more your money grows. With a disciplined approach and a long-term perspective, SIPs offer a reliable way to build an independent financial future.
What Happens if You Miss one or More SIP Installments?
Missing one or more SIP installments is not a cause for concern. There are no penalties for skipping an installment. SIPs are designed to help you build assets over time, so occasional lapses won’t result in any financial penalties or setbacks. Your investment plan remains flexible, allowing you to resume contributions when you’re ready, ensuring your long-term financial goals stay on track.
Can We Do a Manual SIP? Pros and Cons
Yes, you can certainly perform a manual SIP by adding a specified amount of money to your mutual fund each month. This approach offers flexibility, allowing you to change the investment date and amount every month, and take advantage of market dips by buying more units when prices are lower.
However, there are some drawbacks to consider. The primary disadvantage is the risk of forgetting or failing to invest each month, which can disrupt the consistency needed for long-term growth. Manual SIPs require discipline and vigilance to ensure you consistently contribute to your chosen asset class.
Advantages:
- Flexibility: You can change the date and the amount of your investment each month.
- Strategic Buying: You have the option to invest more when the market dips, potentially increasing your returns.
Disadvantages:
- Inconsistency: The main challenge is the risk of missing a monthly contribution, which can disrupt your investment discipline and growth potential.
Manual SIPs offer a personalized investment approach but require diligence to ensure consistent contributions.
Enhancing SIP Returns: A Strategic Approach.
Yes, it’s possible to potentially outperform traditional SIP returns with a strategic method. In addition to regular SIP contributions, you can allocate extra funds based on a specific strategy involving the Net Asset Value (NAV) of your chosen mutual fund.
Here’s how it works: Let’s say you have a monthly SIP of ₹1000 on January 10th, with an NAV of ₹100, which means you purchased 10 units of the mutual fund. If later in the month, the NAV drops below ₹100 after your last SIP, you can consider investing additional funds. For instance, if on January 11th the NAV rises to ₹101, then to ₹112 on the 12th, but drops back to ₹110 on the 13th, and further to ₹108 on the 14th, you might decide to invest additional funds on January 14th if the NAV is below ₹100.
This approach allows you to capitalize on market fluctuations effectively. However, it’s crucial to note that this strategy requires careful monitoring and a good understanding of market trends to maximize potential returns.
Understanding SIP Returns: XIRR Vs CAGR
The returns from SIP investments are often calculated using XIRR (Extended Internal Rate of Returns), whereas fund returns are typically shown in terms of CAGR (Compound Annual Growth Rate). Here’s why:
XIRR vs CAGR:
XIRR measures the actual returns taking into account irregular investments and withdrawals, making it suitable for SIPs where contributions may vary in amount or timing. It considers the exact timing of cash flows, offering a more accurate reflection of returns in such flexible investment scenarios.
On the other hand, CAGR calculates the average annual growth rate of an investment assuming consistent contributions and steady growth. It assumes that investments are made at regular intervals without any changes in amount or timing. While CAGR provides a standardized measure for comparing investment performance, it may not accurately reflect the variability of SIP investments where contributions can fluctuate.
In summary, XIRR is preferred for SIP returns because it accommodates the flexibility and irregularity inherent in SIP contributions, providing a more realistic assessment of actual returns over time.
Interesting Facts about SIP
Investing in mutual funds can be both fascinating and amusing. Here are some interesting and humorous facts about mutual fund investments:
1. Mutual Funds Are Older Than You Think: The first modern mutual fund was established in the Netherlands in 1774. That’s right, mutual funds have been around for over two centuries!
2. Mutual Funds and Pizza: Believe it or not, there’s a mutual fund called the “Domino’s Pizza, Inc. DPK Fund.” It focuses on investments related to the pizza industry. Imagine making dough from your dough!
3. Mutual Funds and Taxes: Mutual funds distribute taxable gains to their shareholders. This means you might owe taxes on gains from investments you didn’t sell yourself. It’s like getting a surprise gift from Uncle Sam every tax season!
4. Too Many Choices: There are thousands of mutual funds out there, each with its own strategy and objective. It’s like choosing toppings for your pizza—sometimes overwhelming, but ultimately delicious when you find the right one.
5. Investing in Mutual Funds is a Marathon, Not a Sprint: Patience is key with mutual funds. It’s like waiting for your favorite band to drop their next album—you know it’s coming, but good things take time.
6. Mutual Funds and Expertise: Mutual fund managers are like chefs—they carefully select ingredients (investments) to create a balanced and tasty portfolio. Bon appétit!
7. Mutual Funds and Diversification: Diversifying your investments with mutual funds is like having a buffet—you get to sample a little bit of everything without putting all your eggs (or bacon) in one basket.
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