SIP or Systematic Investment Planning is an approach towards investment in Mutual Funds (MF). As an investment tool, SIP generates returns, through investment of a fixed amount of money at regular intervals in their chosen funds. It is a disciplined investment path.
Investment through SIP does not impact the returns happening due to market volatility to a great extent. This is because the premium amount is fixed, while number of units purchased depends on Net Asset Value. Since, investment is made at different time periods the market NAV averages out over the period of the SIP.
For Example, an investor invests in an SIP with monthly premium of INR 10,000. The initial NAV in the market is INR 500. With volatile markets, let us assume that the NAV varied as 490, 410, 510, 480 and 550 in the subsequent 5 months. Then the average NAV turns out to be 490. Thus, total units will be ~122.45 and it value will be INR 67,346.94. Thus, despite fluctuations the NAV wasn’t affected much in SIP.
Ways to maximise to returns from SIP:
Invest for as long as possible- It is advisable to invest in SIPs for a long duration to maximise the benefit obtained from low market prices. It is a general tendency that market value takes more time to recover than it takes to fall.
A goal focussed approach- Keeping track of your goals or future requirement helps you to invest in an organised and disciplined way.
Increase investment amount annually- If income or saving, do increase after a year of investment the portfolio cap should be increased by investing more in the same SIP. This helps to cope up with the ever rising inflation in the future.
Stabilise your savings- Once the investment amount has grown sufficiently to satisfy the desired purpose at current NAV, the money should be withdrawn and transferred to a more stable asset.
Thus, SIP is a very safe investment path in mutual funds that conveniently generates moderate to moderately high returns without much hassle being caused to the investor.