Tuesday, April 29, 2008

What is SIP; How does it work ?

SIP is called Systematic Investment Planning.

Let us say that you are a salaried person and earn around 40k per-month. You want to save tax and make investment for your retirement or for your child's higher education or for your daughters marriage. you decide to invest Rs. 1 Lakh every year and get tax benefit under sec 80c.

Instead of putting 1 lakh at one go in Mutual Fund. you split that one lakh in equal installment of Rs. 8500 per month. (1Lakh / 12 months = 8,333.33 approx 8,500 )

Benefits of doing this.
1) Its very easy to do once you sign up for an SIP application form with good ELSS scheme. you can ECS it from your salary account and Rs.8500 will be automatically invested in Mutual fund without you going through the hassle of writing cheque every month.
2) It makes you disciplined as its automated.
3) By investing regularly in small chunks you get the benefit of cost averaging your money. (Which is you buy more units when value is low and buy less units when value is high).

SIP is strongly recommended for each and every individual.

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