In the recent five years, there has been an exponential rise in investing in SIP. Most of the investments happen in SIP. This article explains why SIPs are so popular and the benefits associated with SIP investments. Read here to know about the Benefits of Investing in SIP.
Overview:
Investment in mutual funds can be done in two ways. One is investing as a lump sum amount and the other is through Systematic Investment Plans (SIPs). SIPs are a flexible method of investing in SIP wherein you can invest a fixed amount of your convenience in a mutual fund scheme at predefined intervals. The fixed amount is deducted automatically from the funding account in the mutual fund of your choice on a particular date. Learn more to read to get the benefits of Investing in SIP.
The Benefits of SIP:
- Cost Averaging: SIP allows investors to benefit from cost averaging. By investing a fixed amount regularly, investors buy more units when prices are low and fewer units when prices are high. This helps in reducing the average cost per unit over time.
- Disciplined Investing: SIP instils discipline in investors by encouraging regular investments. It eliminates the need for timing the market and reduces the impact of market volatility on investment decisions.
- Flexibility: SIP offers flexibility in terms of investment amounts. Investors can start with a small amount and gradually increase their investment over time. Additionally, they can choose the frequency of investments, such as monthly, quarterly, or annually, based on their financial goals and cash flow.
- Power of Compounding: SIP allows investors to benefit from the power of compounding. By reinvesting the returns earned on investments, the overall investment grows exponentially over time.
- Diversification: SIP provides the opportunity to invest in a diversified portfolio of assets. Investors can choose from various mutual funds that invest in different asset classes like equity, debt, or a combination of both. This diversification helps in spreading the risk and potentially enhancing returns.
How Can Systematic Investment Plans (SIPs) Benefit You?
SIPs are popular due to the many benefits you can get as a result of investing in SIP. Some of the significant benefits are as follows:
1. Enhanced Discipline in Your Investments and Savings
Savings are important and every individual wants to save for the future. People always complain about not being able to save. Choosing SIPs to invest in at regular intervals will automatically translate into savings before you spend your money. Eventually, this will bring financial discipline and also fetch you good returns in the future.
2. You Can Begin With Small Amounts
More people opt to invest in SIPs as they allow an investment of as little as ₹500 per month. Even if at some point in time, your earnings are very low, you can still become a part of the Indian stock market by opting to investing in SIP plans in various mutual funds.
3. No Worry About Timing the Market
Unlike other investment plans, in SIPs you do not have to stress about timing the market to decide on the investment. This is because when the market is high, you will be allotted fewer shares, and when the market is low, you will be allotted more shares.
The risk is minimised, thus ensuring you acquire investments at a lower average cost per unit share. Therefore SIPs protect investors from making decisions in haste, panic or speculation, and safeguard them from the volatility of financial markets.
4. The Benefit of the Power of Compounding
Investing in SIPs allows you to reinvest the monthly returns derived from the SIP into your investment amount until maturity. So as time passes, you can expose your investment amount to the impact of compounding and helps you with the exponential growth of your investment, fetching better returns.
5. You Can Quit Anytime You Want
Most SIPs do not penalise or impose a fine if you wish to stop or quit the plan at any time. You can process the quitting by going to your Demat account and opt-out of the plan. This benefit is not provided by any traditional investments like Recurring Deposits (RD) or Fixed Deposits (FD).
6. You Can Skip an Investment if Funds Are Tight
There could be circumstances when you do not have sufficient funds in your bank account to investing in SIP. SIPs allow you to skip investment for a month, without imposing any fines or charges. You can still keep investing like before in the following months. This is not a feature that an RD or FD can provide.
7. Starting Multiple SIPS
If you gain more disposable income every month, you can opt to start another SIP plan in various other mutual funds that invest in various other sectors or industries. You can diversify your portfolio by starting your investment in two or more SIPs. This helps you diversify your risks, and you can realise decent returns with the extra money you earned.
8. Use It as an Emergency Fund
By investing money in open-ended funds of SIP, you can withdraw your SIP money at any time of emergency. This kind of flexibility can be of great help to meet your expenses in case of any emergency.
Why Should You Invest in a SIP?
Apart from the many benefits mentioned investing in SIP, SIPs shield investors from many harms. Such harms could be short-term risks, emotional and repulsive reactions, overspending and short-term volatility. Therefore you should investment in SIPs which are the most convenient and safest way of investment in Indian equity markets through mutual funds.
Also, certain investment funds make you qualified for deduction from taxable income under Income Tax Act’s Section 80C. Therefore you can even save tax by investing your savings in a SIP. Due to these great benefits and flexible options, SIPs are the most convenient and popular plan for investing your savings.
Tips to Invest in SIP:
- Set Clear Financial Goals: Before investing in SIP, it is important to define your financial goals. Whether it’s saving for a house, education, retirement, or any other objective, having a clear goal will help determine the investment amount and duration.
- Choose the Right Mutual Fund: Research and select a mutual fund that aligns with your investment goals, risk tolerance, and time horizon. Consider factors such as fund performance, fund manager’s track record, expense ratio, and investment philosophy.
- Start Early and Stay Invested: The power of compounding works best when investments are made for the long term. Starting early allows more time for your investments to grow. It is also advisable to stay invested and avoid frequent withdrawals, as it may hamper the potential returns.
- Monitor and Review: Regularly monitor the performance of your SIP investments and review them periodically. Keep track of the fund’s performance, market conditions, and any changes in your financial goals. If required, make adjustments to your investment strategy.
- Stay Disciplined: Stick to your investment plan and avoid making emotional decisions based on short-term market fluctuations. Maintain discipline by continuing your SIP investments even during market downturns, as it can lead to buying more units at lower prices.
FAQs
Why choose a Systematic Investment Plan?
SIPs are suitable for both novice and experienced investors looking to achieve their financial goals in a systematic and hassle-free manner.
What is the best time for SIP investments?
The best time for SIP investments is when you have the capacity to invest regularly. Timing the market is not crucial in SIPs as they are designed for long-term wealth creation.
Is SIP a good investment option for long-term financial goals?
Yes, SIP is a good investment option for long-term financial goals. It allows investors to benefit from cost averaging and the power of compounding. By investing regularly over a long period, you can achieve your long-term financial goals.
What happens if I miss a SIP payment?
If you miss a SIP payment, most mutual fund houses provide a grace period during which you can make the payment without any penalty. The specific grace period may vary depending on the fund house.
The Takeaway
Starting investment at an early stage of life can fetch you huge returns in the future. You must hold investments for an extended period for getting compounding benefits.
You can start investing in SIP either directly online through an AMC or offline through a mutual fund agent or distributor. To know more about the Benefits of Investing in SIP you should get in touch with investment experts at Vakilsearch.
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