Very often we come across the term SIP or Systematic Investment Plan, but what does this really mean? And as a novice investor why are you encouraged to invest in an SIP? Let me try and answer these questions for you. You’re a beginner, let us assume that you invested a hefty sum of money into an equity mutual fund and due to certain factors the stock market crashed.
As a result, the Net Asset Value of the fund will crash and you will have to face severe loss of capital. However when you invest in an SIP you could choose to invest a small amount of your monthly salary and the chosen amount will get deducted from your bank account every month.
Thus, let us say you invest a small amount of money and the index crashes, the following month you will buy some more shares at a reduced cost and this will bring down your total average cost. Whereas on the other end of the spectrum, if the value of the market rises, you would have already purchased shares at a low cost. In short, an SIP is one of the most convenient and safe way to invest your money and is also one of the most popular forms of investment today.
As it is with Mutual Funds, the type of SIP that one invests in all differs depending upon the varied investment objectives and the period of time when the investment occurs.
