Jerry Mononela- Basics of Systematic Investment Plan
We all have heard the amazing stuff about SIPs in the ads, but they give very little information on what SIPs are. So in today’s blog post, I will be guiding you through the basics of a SIP.
What Is A SIP?
First things first, an SIP is a Systematic Investment Plan. And according to its name, it is a structure that is designed to systematically invest funds taken from your account either over multiple ventures or concentrated towards one.
A systematic investment plan can take funds from an account set up in your name and it can be a mutual fund, trading account, or a retirement account. You would have to transfer funds into such accounts over a fixed period that is decided by you. The returns from such accounts would be small but accumulate into a large sum across a long period.
That is the selling point of a SIP.
How Do SIPs Help Me?
Well, just like any investment plans, there are no guarantees when it comes to SIPs, though SIPs are considered less risky than other investments as they give you a return by accumulating small profits over a long time.
That is the selling point of a SIP. They are much safer than other investment options and don’t require a hands-on approach. They are helpful for people who want to invest small amounts of money regularly and have the assurance of a return after a significant period.
How Do SIPs Work?
Systematic Investment plans work actually on a very simple concept that is hoohaa by financial advisors. The concept is called DCA or Dollar Cost Averaging. DCA means that an investor buys a stock at a fixed amount regardless of the actual market value. That enables the investor to buy stock either at a profit when prices are up or for a loss when prices are down.
SIPs are different from regular investments as investors continue to pay funds to their mutual fund or trading account through all the ups and downs instead of cashing out when the stock is highly valued or cashing in when the stock is low valued.
SIPs work in the favour of the investor as the market is often frisky. The stock value goes up and down quite regularly. So instead of solely focusing on cashing in and out, a regular person can get a SIP and see a significant return in the future by paying small, regular amounts of money continuously.
SIPs get the investor a return in small amounts in exchange for a fixed investment that results in a huge sum after a long period.
Put in simple words, that is how SIPs work.
What Are The Benefits Of SIPs?
If I am being honest here, SIPs are the best option for any person who doesn’t have that much knowledge of investing and wants to invest a comparatively small amount with a much lower risk. And that is what SIPs provide you.
They take in very little capital. That means that there is no hurry or tension to get in funds for your investment account. For SIPs, you just have to ensure that your funding account has enough money to make the monthly or weekly payment that has to go out.
They have a fixed capital. In SIPs, you fix a capital at the start of the term. And that is the amount that will be taken out of your funding account till the SIP gets over. This helps in not worrying much about how your stock is performing as you would only see a significant change in the future.
They reduce investments. SIPs on average save a lot of money for the investor. Since they are comparatively a safer form of investment and work with fewer funds, SIPs increase the return per investment ratio for you.
What Are The Disadvantages of SIPs?
SIPs are great for a newbie who is looking to invest his monthly savings safely, but they do have a lot of predicaments that might get in the way of future investments.
SIPs require long term funding. That means if you have a SIP you have to keep investing until the fixed term for that SIP is over. This leaves less flexibility for other investment plans.
They have heavy penalties for early withdrawals. Since SIPs work systematically for a long period, early withdrawal from such plans is often carried out with hefty fines. So SIPs have the benefit of low risk and high return after a long time, but you have to be committed throughout.
Are SIPs Worth It?
To be honest, SIPs are a great option for a person who does not have too much knowledge about the stock market but wants to have a try at investments anyway. SIPs are a great option for that as they are very low risk and high returning.
The only catch is that in a SIP the investor has to be committed over the long term. So if you can handle funding small amounts of money over a long course and are a newbie in the field of investment, then SIPs are a great option for you.
Different brokerage firms have different SIPs and I would recommend checking all of them out and comparing them lucratively. Choose the one that suits you the most and then go for it. SIPs turn out great for the majority.
For more information, visit: http://jerrymononela.co.za/
