"I have just started working and don’t have enough money to invest. I will save up for a few months so that I have money to invest"
People often mistakenly believe that they have to collect a large sum to start investing. You don’t. And that’s where a SIP comes in.
What is a SIP?
The best way to accumulate wealth is by setting aside a small amount of money every month from your salary before you start to spend it. If you are in the early stages of your career it doesn’t even matter how much that amount is – even Rs 1000 per month is a good start.
The question then is what to do with that saving? You could keep it sitting in your savings account (bad idea) or start a recurring deposit (RD). You could also start investing it in mutual funds. This regular monthly investment in a mutual fund is called a SIP – short for Systematic Investment Plan.
You instruct the mutual fund or your chosen investment platform (like Scripbox) how much you want to save/ invest every month and the money gets automatically transferred from your bank account and invested in the mutual fund of your choice.
Building the investing habit
So a SIP is just a common sense way to invest. A way to follow the investing principle of save before you spend. This habit helps you prepare for life’s commitments such as home purchase, marriage and education for children.
A SIP is also scheduled for a particular number of months. So a 3-year SIP would be 36 months. In the case of equity mutual funds, a long term SIP for a duration of 84 months is advised.
Is SIP a better option as compared to investing money all at once?
For the vast majority of us, investing every month is the only option. Having large lump sums is a rare event. So this is really a theoretical question.
If you wait till December to invest a large lump sum, you are delaying the investment of the sum you set aside in January. During that period your saving earns a savings account interest rather than a potentially higher equity return.
For example, a SIP of Rs 3000 per month for 3 years into a debt mutual fund will net you about Rs. 1.22 Lakh. If you invest it every year as Rs 36,000 at the end of the year, the amount will be Rs 1.16 Lakh. However, if you had the entire amount of Rs 1.08 Lakh in the beginning (a bonus for example) and invested it, You would have Rs. 1.36 Lakh.
This tells us that investing as soon as we have the money makes more sense than delaying it.
SIPs help in averaging out risk but not by a huge margin
You might have heard of this concept called Rupee cost averaging. According to this concept, money that is invested regularly and is spread over a period of time tends to reduce the volatility risk your money is exposed to. This is true but not the reason to do a SIP.
So what are the real reasons why anyone should consider SIPs approach to investing?
1. You want to start early with your investing and you want to start small. – The most important reason
2. You want to build the saving and investing habit.
3. You do not have lump sum amounts to invest.
So now you know how SIPs can help you get started with investing and the real ways SIPs can help you, in your wealth creation efforts.