Systematic Investment Plan (SIP) in mutual fund investments are preferred by investors due to its many benefits ranging from cultivating the discipline of regular investments to averaging the cost per unit. They are considered the most effective form of mutual fund investment. SIPs are automatically deducted as per the predetermined limit since these are linked to the investor’s bank account. SIP investments are mostly set to a default of one month, which means the amount of investment is deducted every month.
Most investors prefer monthly SIPs for their investment portfolio.
Did you know, SIPs need not be restricted to a month and these can also be weekly or fortnightly? This means, instead of a monthly investment, an investor can invest every 7 or 15 days. This brings us to the question, should an investor choose a weekly or monthly SIP investment? To answer this, let’s deep dive into the concept of Weekly SIPs and understand how they work.
What is a SIP?
A SIP allows investors to regularly invest a fixed amount, as small as Rs 100, in a mutual fund. Investors can choose the regularity of investment–like, weekly, monthly, quarterly, or annually.
A SIP should not be confused to be a synonym for a mutual fund. A SIP acts as a tool to invest in mutual fund schemes regularly. It helps investors to stagger the investment amount over a period. Customized SIPs come in the form of weekly, bi-weekly, or fortnightly or even daily formats. In the next section, we will discuss the benefits of Weekly SIP.
Benefits of a Weekly SIP
Some of the key benefits that you can avail yourself from a weekly SIP are:
- In general, SIP lets investors participate in the stock market without worrying about actively timing them. As weekly SIPs are more frequent they help investors to reduce the risk from market timing
- As weekly SIPs involve lesser amounts of outgo, it may be easier for the investor to maintain his/her investments.
- Weekly SIPs may help self-employed and those not receiving a regular income like the salaried start investing with smaller weekly amounts.
- Frequent SIPs can help you build up the discipline of investing.
- Every time an investor uses SIP to invest in a mutual fund scheme, he/she purchases some fund units which are determined as per the amount invested. SIP helps investors to benefit from bullish and also bearish market movements. For instance, when the markets are not performing well, an investor can purchase additional fund units with the same amount of money. On the other hand, he/she can purchase fewer units when the markets are on an upswing.
- Frequent purchases can help you get better rupee cost averaging.
- Since the investment happens frequently within a short period, investors can accumulate more units when the market is down and vice versa.
- Weekly SIPs are flexible, in that an investor can pause these at any time. Also, investors can redeem their investment, provided there is no lock-in period set by the fund house.
Drawbacks of a Weekly SIP
Here are some of the disadvantages of weekly SIP that investors must take note of:
- Investors could find it difficult to constantly track and manage their cash flow. This is primarily because the format demands weekly investment and investors must have enough liquid cash for the same.
- Another disadvantage of weekly SIP is short-term fluctuation. This could distract investors from their end goal.
How investing in SIPs help you create wealth?
In return for the money invested in mutual funds, investors are allotted a certain number of units of the scheme.
For instance, let’s assume that a mutual fund NAV is currently Rs 20. If an investor invests Rs 1,000 in the scheme, he/she will get 50 units of the mutual fund scheme. In case the NAV rises to Rs 30, then the 50 units of the investor would be worth Rs 1,500 as compared to Rs. 1,000 that was originally invested.
This is how the investment grows, helping the investor to generate wealth in the long term. (This example assumes that the mutual fund performs well, and the NAV grows. Some mutual funds may also underperform and investors could lose the investment value, hence, it is important to thoroughly understand the mutual fund scheme before investing)
Investing through SIPs also inculcates a discipline within an investment approach. Let’s assume an individual earns Rs 10,000 every month and cannot control expenses within a planned budget. In such a scenario, at the end of the month, he/she will be left with no savings.
If, however, the individual invests in SIP, he/she will be forced to follow a discipline around the investment regime. It will encourage expense planning and budgeting in order to save for the SIP investment. This way one can achieve financial goals in the long term.
Do weekly SIPs help in earning better returns?
This must be the million-dollar question on your minds. After all, you invest to earn good returns, so you must be wondering if investing more frequently can help you earn higher returns.
There are many studies conducted on this subject and the results from weekly SIPs haven’t been significantly higher than the monthly SIPs. So if you are looking to invest through the weekly SIP route just for earning higher returns that may not work. But you could consider going in for weekly SIPs for other reasons as mentioned above.
In recent years, the SIP investment form has gained popularity among mutual fund investors. Without adding stress to an individual’s present financial state, it helps to save and achieve future financial goals. Investors must use some amount of due diligence while choosing a fund option and measure it against their investment horizon.