SIPs provide with the flexibility to buy more units when the price declines and fewer units when the price surges.
Systematic Investment Plan follows the principle of regular investment wherein an investor can put in a small amount every month in a particular mutual fund. Investors make small periodic investments at stipulated period. Investors can take part in the volatile stock markets without timing the high and lows of market. SIPs provide with the flexibility to buy more units when the price declines and fewer units when the price surges. SIP works on two important principles. They are:
Rupee cost averaging: Under Rupee cost averaging system, investors dont need to worry about when and what amount to invest. They can invest a fixed sum of money at regular intervals and over time, the investment itself averages out the costs. The fixed investment at regular intervals will get more units when the NAV of units are down, and vice versa. The price of single unit is not important as the average price at the end is what matters. The returns are calculated on the average cost. It indirectly supports the concept of buy low and sell high. In simple terms, Rupee Cost Averaging helps investors to average the purchase price of an asset. It does not focus on the selling aspect. Rupee cost averaging eliminates the investors urge to time the market.
Power of compounding: Systematic Investment Plans works on power of compounding. Compounding is the best thing that has ever happened in the financial world. Investors can put in a small amount of funds and can see the value increase over time. The longer the time duration of the investment, the greater the value of the investment becomes. The returns earned at regular intervals are reinvested in the fund. As a result, investors get a return on the return, and the same cycle continues for years. Investors should start savings at an early age to make most of power of compounding.