What is SIP and why is it preferred?

SIP refers to Systematic Investment Plan. SIP is a method of investing a regular amount of money every certain time period, say a month. It is an alternative to investing a large sum of money at once. SIP is a good method of investment, specially for those who do not have a large sum of money to invest at a go or even if they have but they are not able to invest all of them at the same time, due to whatever reasons. It is a good method for those who are working and earn a fixed sum of money every month. Like for example, if a person earns 20,000 rupees a month and his expenses are 10,000, then he can easily invest at least 5,000 a month. Most of the working professionals do not have a large sum of money to invest, so they can go into SIP method and can save quite a lot of money on a recurring basis and also enjoy good returns on his savings. SIP is also preferred by those people who wants a good saving but cannot resist spending money. If their money would directly deduct from the account and go into a plan that has a 3 to 5 year locking period, then there is no chance they can take out money or spend anywhere.

In SIP method, you buy share units every month/quarter based on the share value at that current time. So it balances itself at the end, since we know that the market keeps going up and down every time and your shares will be bought at a time the market is low, as well as at the time the market is high. If the market is too high at a time you want to invest, SIP is the best way to go, since if you invest a large sum at a high price and the market falls, your large sum value will go way down but in SIP, you only purchased a little bit at that high time and once the market falls, you do incur a loss but only on the small sum you invested, all the rest of the investments that will proceed in further months will be bought in a lower market value. So like I said, it averages out at the end.

But remember that SIP does not offer you a very high gain that you can get from a one time investment of a large sum but it is more sort of a very safe play and plus keeps regular disciplined savings. If you have a large sum of money to invest in the market and want a good gain on it then prefer some one time investments of large sums in different sectors of the market, specially at a time when market is going low.