Here’s how SIP helps navigate the emotional roller coaster of investing

In September 2023, investments in mutual funds through Systematic Investment Plan (SIP) in India crossed an impressive ₹16,042 crore mark, according to Association of Mutual Funds in India (AMFI) . This statistic shows the growing trend among Indian investors to make investments through SIP in various mutual fund schemes, with a substantial portion of them starting SIPs online. The surge in SIP popularity can be attributed to several factors, including its potential to help investors navigate the emotional roller coaster of investing and protect their investments against inflation.

Six ways in which Systematic Investment Plans helps investors invest better:

  1. SIPs offer the benefit of rupee cost averaging

One of the most significant advantages of investing through SIPs is rupee cost averaging. rupee cost averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. Over time, this strategy smoothens the overall purchase price of an investor’s investments. Consider the following scenario. An investor invests ₹ 5,000 in an SIP on the 5th of every month. The mutual fund’s NAV (Net Asset Value) is ₹50 in the first month. Hence, the investor is able to purchases 100 units this month. In the next month, the NAV drops to ₹40, allowing them to buy 125 units for the same investment amount. This process continues, and the investor eventually accumulates more units when prices are lower, and fewer when prices are higher. This way, they avoid the emotional burden of timing the market and benefit from the long-term growth potential of the market.

  1. Investors can choose SIPs to invest more systematically

Investing systematically is key to building wealth over time. SIPs offer investors the opportunity to do just that. By setting up automatic deductions from their bank accounts using one-time mandate (OTM), investors ensure consistent investing. Once the OTM is set up, the investments continue automatically irrespective of market ups and downs. This eliminates the burden of investors having to manually invest every month. Further, this prevents investors from emotional decisions like stopping SIPs during market crashes or waiting for that mythical correction to invest.

  1. SIP investments do not weigh heavily on one’s pocket

One of the biggest emotional barriers for many investors, especially first-time investors, is investing a large lumpsum amount at one go. The idea of putting in a big chunk of savings into the markets in one shot can be nerve-wracking for some. This is where SIPs can make a big difference. Since SIPs allow periodic investments of smaller fixed amounts, the per-installment investment is smaller.

  1. Investors can diversify their investment portfolio through SIP investments

Diversification is a fundamental strategy to mitigate risk and enhance returns in a portfolio. SIPs facilitate this diversification by allowing investors to spread their investments across various mutual funds or asset classes. This diversification that SIP provides help mitigate investors’ worry about losses. When investment is distributed across various funds and asset classes through SIPs, the risk gets diminished.

SIPs are a versatile and valuable tool for investors looking to navigate the emotional roller coaster of investing. If an investor is considering investment options, they can use an online SIP calculator to determine the ideal monthly SIP amount that will help secure their financial future.