There are very few points that everybody in this world agrees upon. And the stock market unpredictability is undoubtedly one of them. Even people with several years of experience are not always able to track the stock market dynamics, thus falling prey to faulty decisions. Watertight stock market investing strategy is something that people consider to be elusive. It is something that can be chased, but probably can never be achieved.
But is it a correct notion? Are things like fate, luck, chance, etc., are the only deciding factors in the stock market investments? Or is there any way to approach the stock market in a speculative manner?
The answer to the above question probably lies in the Systematic Investment Plan or SIP (a.k.a. "Periodic Payment Plan" or "Contractual Plan").
Systematic Investment Plan (SIP) Unlike the one-time investment plans, SIP entails regular payments for a fixed period. It allows investors to garner shares of a mutual fund by contributing a fixed (which is often small) amount of money on a regular basis. And it offers the following advantages readily attractive to any investor.
Reduced pressure on your purse – Through SIP you can enter the stock market even with a paltry investment. Your inability to invest a more-or-less fat amount might have kept you away from investing in the stock market. SIP is an ideal solution for your problem.
Building for the future – We have certain needs that can be addressed only through long-term investments. Such needs include children’s education, buying a house of your own, post-retirement emergencies, etc. And SIP offers precious help in this regard. It helps you to save a small amount on a regular basis. And in due time it turns into a substantial amount.
Compounds returns – SIP not only helps you reach a substantial amount after a certain period of time. Rather it helps you to reach that amount at an early age, depending when you start investing. You can amass a notable amount at 70 if you start investing at 35. An earlier start at 25 can enable you achieve the same amount by 60.
Lowering the average cost – In SIP you experience low average cost, courtesy dollar-cost average. You invest the same fixed dollar amount in the same investment at regular intervals over an extended period of time. You are buying more shares of an investment when the share price is low. And you are buying fewer shares when the share price is high. And it may result in you paying a lower average price per share.
The dollar-cost averaging strategy does not try to time the market. Rather it reduces the risk of investing a larger amount in an investment at a wrong time. And it does the same by spreading your investments out over a period of months, years, or even decades.
Market timing irrelevance – The previous two paragraphs tell you that SIP makes the market timing irrelevant for you. The stock market unpredictability and volatility often play a deterrent for wannabe investors like you. In SIP, you are completely free from this problem of wrong timing.
The SIP’s mode of function
A typical SIP entails monthly investments over a period of 10, 15 or 25 years. You are generally allowed to start your investment with a modest sum.
You do not have direct ownership of the funds. Rather you own an interest in the plan trust. The plan trust invests the investor's regular payments, after deducting applicable fees, in shares of a mutual fund.
Things that you should make clear before investing in an SIP
You should make certain things clear to yourself before going for an SIP investment. They include the following –
a. You should be confident about continuing to make payments for the term of the plan. Withdrawal in the mid way will almost certainly make you lose your money unless you are eligible for a full refund.
b. Check the fees charged by the plan. Also check the circumstances under which the plan waives or reduces certain fees.
c. Study the plan’s investment objectives. Take a note of the risks of investing in the plan. And check whether you are comfortable with them.
d. Check your statutory rights to a refund in case you cancel your plan.
