One of the best and innovative features of mutual funds is the Systematic Investment Plan (SIP) option. This plan allows you to maintain investment discipline and follow a long-term approach, which are two important pillars of financial independence.
Such plans provide you with an excellent opportunity to build wealth over a longer period of time. Systematic plans allow you to invest a small amount at fixed intervals in your chosen mutual fund schemes.
Because a small amount is invested, you do not feel any financial burden. Just like an Equated Monthly Installment (EMI), the investment becomes a monthly installment making it an excellent option.
Maximizing the advantages of SIPs
There are several ways in which you may maximize the benefits of SIPs. Firstly, you may opt for the virtual plans, which continue until you manually discontinue the investment. Such an option was not previously available and the plans often continued for a maximum period of five years. After the end of this period, you had to renew your investment, which was slightly inconvenient as it required completing certain formalities.
One of the greatest advantages of an SIP investment is the power of compounding. This means that when you continue to remain invested for the long-term, your profits are reinvested and thereby earn additional returns. With perpetual systematic plans, your investments continue without any break allowing you to build a larger corpus in the long-term.
Step-up your investment amount
Over the years, your income, as well as your, expenses increase. Similarly, when you invest in SIP, you have the option to step-up your investment amount over a period of time. Mutual fund houses provide a top-up option whereby the investment amount automatically increases at a particular period at a pre-defined rate.
This option is available when you first commence the systematic plan. Therefore, you may specify if you want to increase the investment amount at a regular period at the time of making an application for commencing the plan.
Some mutual fund houses allow top-up annually while others provide this feature bi-annually. A few fund houses may provide both these options. If you wish to discontinue the top-up investment, you must cancel the same and start a new plan.
Determining the right time to invest
The earlier you begin the investment, the higher the probability of building a larger corpus. When you are young, you do not have too many financial responsibilities but have multiple goals such as your wedding or buying a home.
At this stage in your life, you may not have a large investible surplus, which makes systematic plans an excellent option. You may begin with a small amount at regular intervals and gradually increase the amount as your income rises.
With several benefits of step-up systematic investment plans, it is recommended you start one today if you do not already have one.