Many people want to grow their money but don’t know how to start, especially if you don’t have a big lump sum to invest at first. This is where knowing what SIP investment is comes in handy. This is a structured way to build wealth over time, and doesn’t need a lump sum on day one.
What is SIP Investment?
What exactly is SIP investment? This is an investment strategy where a fixed amount is invested in a mutual fund scheme at regular intervals of time – be it daily, weekly, monthly or quarterly, depending upon the scheme – instead of investing a large sum at one go. Each instalment purchases units in the scheme at the prevailing Net Asset Value (NAV). Over time, these instalments accumulate into a larger investment.
This is unlike investing a lump sum amount at one go. With SIP investment, you are spreading your investment over a period of time. This helps in reducing the impact of trying to time the market.
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How SIP Helps in Wealth Creation
The wealth creation potential of SIP investment is a result of a combination of factors working together over a period of time:
- Regularity: Investing regularly creates a habit and means you don’t have to make a new decision about investing every month.
- Rupee cost averaging: A fixed amount buys more units when the NAV is low and lesser units when it is higher, which can average out your purchase cost over a period of time.
- Time in the market: The earlier instalments are invested for longer, giving any potential growth more time to compound, assuming returns are reinvested.
A good starting point is to start by setting up a small amount that you are comfortable with and then think about increasing it as your income grows. Facilities like a step-up SIP can be used if available.
An Example
Let’s take an example of SIP where you are investing Rs 5,000 every month. That amount buys units in your chosen scheme each month at that day’s NAV. When markets are down, you get more units for the same Rs 5,000 and when markets are up, you get less. This pattern can over time help average out your overall cost per unit, but it doesn’t eliminate market risk or promise a profit.
Key things to keep in mind
SIP investment is a popular way of building wealth but it is important to know that:
- Returns are fully connected to the market and aren’t fixed or guaranteed.
- The value of your investment may go up or down, including short-term falls.
- The result is largely dependent on the scheme chosen, the investment tenure and the regularity of the SIP.
- Selecting a scheme that fits your goal, risk appetite and time horizon is as important as starting the SIP itself.
Understand the Whole Process
If you want to know more about SIP investment, including the different types of SIP, benefits offered by them and how SIPs fare over other investment options, then our comprehensive SIP Guide has all the details that you need to know.
Do Your Own Research
Using your inputs, the SIP Calculator can provide an illustrative projection of how your monthly SIP investment amount can potentially grow over different durations.
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Final Conclusion
Now that you know what a sip investment is, you can start thinking about how to align it to your own financial objectives. Tata Mutual Fund is providing this guide as a starting point for you to begin your journey to create long term wealth in an informed manner.
Market risk is associated with mutual fund investments. Please read all scheme related documents carefully.