SIP, also known as Regular Savings Plan (RSP) in some countries, allows you to invest a fixed amount at pre-defined frequencies in mutual funds. A recurring deposit offered by bank or post office is the only other investment option that is similar to SIP.
Benefits of Investing via SIP
1) SIP enforces investing discipline
As SIPs require you to invest periodically and continuously and over time, SIPs make periodic investing more of a habit. By regularly investing you tend to be more focused on achieving your financial goals. This brings in investing discipline.
2) No need to time the markets
Everyone in the market wants to buy low and sell high. This is known as timing the market. The only catch is that no one knows when to buy and when to sell. Timing the market is a risky and time-consuming process as:
i) One has to identify and research stocks that are undervalued to invest in them.
ii) Even after investing in the stock, one is not guaranteed of the returns.
3) Rupee Cost Averaging (RCA)
Rupee Cost Averaging (known in the West as Dollar Cost Averaging) is an investment strategy widely used by investors all over the world. This calls for you to invest a fixed amount of money regularly (on a monthly, quarterly or yearly basis) in a disciplined manner.
The main benefit of RCA is that it takes the guesswork out of investing and thereby the need to time the markets. If the price of the fund increases, you would naturally be able to subscribe to a lesser number of units. You would buy more units during market slumps and fewer units during market up-turns.
4) Very low monthly investments
Most SIP schemes require you to put in very low amounts. The amounts can be as low as Rs. 500 to Rs. 1,000 per month and some schemes have even lowered the bar by requiring you to pay Rs. 100 only per month.