When investing in mutual funds, potential investors are often faced with the dilemma of whether to invest a lump sum or small amounts regularly. The latter approach also referred to as a Systematic Investment Plan (SIP), appears to be more expedient as it assists in saving and multiplying money over time. Plus, there is a certain discipline here with the returns averaging according to the market conditions.
Of course, the opening reason is inadequate to prompt one to believe in the notion of SIP. Setting up a SIP mandate requires one to fully agree with the benefits it will attract in the future. So, let us start by introducing you to the advantages of SIP and leave you with the decision.
Before exploring the reasons why SIP makes sense, let us introduce you to the concept a bit.
SIP is a mode of investment where a fixed sum of money is debited from one’s account and invested in chosen mutual funds. In exchange, the investor is allocated specified units as per the Net Asset Value (NAV). With every investment, more units will be added to the investor's account.
Now that you have a fair bit of an idea about SIP, let us dive into the advantages and check why this strategy has gained the popularity it currently enjoys.
Flexible mode of investment
One of the most talked about benefits of SIP is that investors have every right to choose the amount they wish to invest. In India, you can start with a little amount per month and raise the frequency of payments with a hike in your salary by leveraging the step-up feature of SIP. Plus, there is no hard and fast rule about how many SIPs you make at once and for how long.
A hassle-free process
Setting up SIP is incredibly easy. It requires signing up for a mutual fund scheme and doing so online takes only a few minutes. Processing, on the contrary, takes 2-3 weeks, after which investors can assess their accounts online at their convenience. Deduction of money periodically is also automatic, which implies there is practically no hassle of making manual payments every month, quarterly or half-yearly.
Encourages a disciplined approach to investing
The automatic deduction of a fixed sum every month in a market linked with investments cultivates a habit of saving in investors. Now, you may compare it to recurring deposits, but we bet the returns will beat inflation. However, SIP inculcates financial discipline into investors and generates real returns that easily outperform inflation.
Compounding
Let us introduce you to the concept of compounding. It happens when the returns generated from a sum of investments start earning more returns. Over time, a snowball effect initiates, causing the potential returns to increase multiple times. The clue here is the extended period. The more years you have in hand, the compounded the returns will be through SIP. The power of compounding is best realised when one begins investing early.
Rupee cost averaging
This one is worth mentioning as it liberates you from the worries of market timing when investing in mutual funds through SIPs. The concept is simple and involves purchasing more units when the NAV is low and lesser units when it’s high. The motive is to average out the purchase cost over your SIP tenure for the impact of short-term market fluctuations to be gentle.
Higher returns in the long run
As compared to conventional investment approaches like PPFs and recurring deposits, SIPs generate significant returns. The credit, of course, goes to professional and experienced fund managers working with their team of qualified research analysts. They carefully select equity mutual funds with greater profit margins so that investors achieve their long-term financial goals sooner than expected.
Allows for starting with a small amount
As discussed earlier, SIPs can be started with limited earnings. It visibly implies that anyone with limited earnings can start a SIP without the need to invest a lump sum of money. There is also the flexibility to contribute more with a top-up SIP when there is an influx of money.
Cost-effective
Investing in SIP is affordable, with the management fees spread over a long period. You will not even feel the impact of fees on your overall returns.
Portfolio diversification
Ever heard of the saying – never put all your eggs into the same basket? SIPs follow this idea ardently. It allows individuals to diversify their portfolios by investing in several bonds and stocks. So, the risk of market volatility hardly has an impact on one’s overall returns.
Allows for skipping of funds
Financial exigency may hinder you from paying your monthly contribution towards SIP due to inadequate funds in your bank account. However, you can continue without worries of fines or charges. As long as you return later and resume investing, there is nothing to fret about.
Remember the adage, “Rome was not built in a day”? The same idea applies to SIP. If you want your patience to meet prosperity, invest early and enjoy consistent and steady returns from investment. Since it takes a disciplined approach to investing, achieving long-term financial success is easy. Now that you know the privileges of this strategy, we look forward to you making an informed decision. May luck be on your side!
