How SIP Works:
When you opt for SIP, you authorize the mutual fund to deduct a fixed amount from your bank account at regular intervals (monthly, quarterly, etc.). This amount is then used to purchase units of the mutual fund at the prevailing Net Asset Value (NAV). So, when the NAV is higher, you purchase fewer units, and when the NAV is lower, you purchase more units. Over time, this helps in rupee-cost averaging, as you buy more units when prices are low and fewer units when prices are high.
Advantages of SIP:
a. Disciplined Investing: SIP promotes disciplined investing habits by encouraging regular contributions. It eliminates the need to time the market, as investments are made systematically irrespective of market conditions.
b. Mitigates Timing Risks: Since SIP invests at regular intervals, it reduces the impact of market volatility. Investors buy more units when the market is down and fewer units when the market is up, averaging out the cost of investment.
c. Rupee-Cost Averaging: As mentioned earlier, SIP allows investors to take advantage of rupee-cost averaging, which can help smoothen the impact of market fluctuations on the overall investment.
d. Affordable and Convenient: SIPs have low minimum investment requirements, making them accessible to a wide range of investors. Additionally, the automation of SIP transactions makes it a convenient way to invest regularly.
e. Power of Compounding: By investing regularly and staying invested over the long term, investors can benefit from the power of compounding, which can significantly boost returns over time.
