Rupee-cost averaging: Why SIPs are more profitable?

What exactly is it about Systematic Investment Plans (SIPs) that make them a profitable and efficient investment option?

The introduction of Systematic Investment Plans (SIPs), has changed the way investors buy units and invest in the last few years. You no longer have to constantly track markets to cash in on the benefits of mutual funds. This scheme allows you to regularly invest a fixed amount at specific intervals, (monthly or quarterly). In a way, it is like the Recurring Deposit (RD) scheme offered by the banks.

SIPs can be made in various investment vehicles such as the Debt Funds, Equity Funds, Gold ETFs and the money market, on the lines of a financial approach known as ‘rupee-cost averaging’.

What is Rupee-cost averaging?

It is an approach in which one invests a fixed amount of money at regular intervals, ensuring you can buy more shares of an investment when prices are low, and less when they are high.

Let’s face it; a person cannot possibly turn into a millionaire overnight, unless he or she hits the jackpot or buys a winning lottery ticket.

But one can be assured a considerable amount of money if it is diligently accumulated over a period. The SIP route involves such a diligent accumulation (and investment), and it goes a long way in multiplying your savings.

It is not for nothing that financial advisors stress the importance of ‘staying invested’ over the long haul. 

Related: 10 things you can do with your savings

The Basics

At the outset, it is necessary to grasp that SIP is not a product, but merely a way to make investments in financial vehicles in the form of Fixed Deposits, Debt Fund, Stocks, Mutual Funds, Real Estate, and Exchange Traded Funds or ETFs (in gold, oil or commodities).

People usually opt for a SIP if they value long-term prospects or do not want to be at the receiving end of short-term fluctuations. 

SIPs are also popular among salaried people who need to “invest something” for tax saving or wealth accumulating reasons. 

The third set of people who find SIPs a handy option includes those who don’t have time to track the market to buy at low prices, and are okay with buying at an “average price”.

SIPs are recommended for those who are new to capital markets and hesitant about dabbling in equities. It enables them to slowly find their way around the market and understand it.

On the other hand, there may also be among new investors the adventurous kind, who are tempted to take large exposures in single deals. It may be wiser to enter the markets gradually, and systematically, allocating a certain amount of money to equities on a periodic basis – the SIP way. 

This can help in rupee cost averaging and take care of any volatility that may arise from various market cycles even as the investment is made. 

What makes SIPs a profitable and safe way to invest, is that they cushion the investor from market volatility. These plans ensure you invest a fixed amount regularly and reward you with long-term financial gains.

Related: Step by step process to starting an SIP

The rewards of SIPs

Following are the advantages and disadvantages of sip:

• It frees investors of the usual stress associated with investing; such as timing the market. This is because a fixed amount is deducted from the investor’s account for investment, making them an attractive investment for salaried people and those facing time constraints.
• Short-term market fluctuations do not have much of an adverse impact as would have been the case otherwise. The reason for this is that if prices reduce by, say 10% in the next month, investors have the luxury of knowing they can buy units at the reduced price too, in the following days. And if the market recovers to the previous level, they can make money.
• Investments through SIP usually yield better returns over a longer period. Saving a little every month can lead to huge amount at the end of 40 years, as SIPs possess a fantastic potential of compounding and multiplying to larger amounts.

Related: SIPs for Dummies | Meaning of Systematic Investment Plan

• SIPs can be terminated at any given point through a written request; it takes about a month for the plan to be discontinued. Similarly, the investment amount can either be increased or reduced by terminating the ongoing SIP and starting afresh with a new one.?
• SIP investments can be made regularly, either on a weekly, fortnightly or monthly basis. They can be begun on an amount as low as Rs 5,000). 

The icing on the cake: as one’s money grows, SIPs also encourage a saving habit.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment, insurance, tax or legal advice. You are encouraged to separately obtain independent advice when making decisions in these areas.