Small but consistent efforts can magnify results over the years. That’s exactly what SIPs are.
SIP or Systematic Investment Plan is one of the safest and smartest investment methods. It’s convenient and consistent, and you can start investing with only 500 INR per SIP cycle.
We can say that SIP and long-term gains are pretty much synonymous with one another. It’s perfect for beginners as the longer you stay invested, the more you’ll gain. It’s never too late to start a SIP.
Besides, one should always have a couple of SIPs to take advantage of compounding and rupee cost averaging.
Why do financial advisors recommend it and what are the advantages of SIPs? Let’s find out.
What is a Systematic Investment Plan?
A Systematic Investment Plan or SIP is one of the simplest methods to invest a fixed amount of money in your choice of mutual funds at a regular intervals. You can invest money on a Monthly, Quarterly, or Semi-annual basis based on your preferences. It can be done for a specific period and allows you to diversify your investment portfolio with a smaller amount.
Top 5 Benefits of Mutual Fund SIPs
Whether to go with a lump sum amount or start a SIP has always been a question among new investors. While both methods have their own benefits, SIPs are more disciplined.
Why? Because you put a certain amount of money aside each month without thinking about market ups and downs. It doesn’t affect your decisions. So, in the long run, you can see your portfolio grow.
For a lump sum investment, you need a larger amount at once. But with SIPs, you only need a smaller amount per month to start.
1. You Can Start Investing with a Small Amount
You can start SIPs from as low as INR. 500 per month. Many mutual funds allow you to invest in installments as low as INR. 500-1000. Anyone can start an SIP without worrying about funds. You can increase the monthly amount whenever you have more funds to put aside.
By investing a small amount each month, SIPs gradually build your wealth for the future.
2. SIPs Encourage Disciplined Investment and Savings
Quite often, financial goals remain inconsistent due to irregular investments. SIPs encourage you to have disciplined investment to keep building your wealth.
You can set your bank account to auto-debit SIPs each month. So even if you forget about monthly installments, auto-debit can take care of it. Disciplined investment is one of the most important pillars to meet your financial goals.
3. SIPs Aren’t Necessarily Relevant to Market Timing
Many investors spend hours analyzing market timing to find the perfect day to invest money. While in some cases, it can bring high returns; you can’t get lucky all the time.
Mapping the market timing with your investment can affect your decisions. With SIP, you simply invest a fixed amount without worrying about market volatility. In fact, SIP is a straightforward method to deal with market ups and downs.
4. SIPs Enable Rupee Cost Averaging
Rupee Cost Averaging is another benefit of investing in SIPs. It averages out your investment by adjusting the purchase of units based on the current price (Net Asset Value).
In simple words, it buys fewer units when the NAV is high and more units when the NAV is low. You don’t have to worry about the market rising or falling. Averaging takes care of adjusting investments and boosting returns.
5. You Can Benefit From The Power of Compounding
Compounding can exponentially increase your returns through mutual funds. It’s a simple process of re-investing the returns earned on your principal invested amount back into the funds until maturity.
Even if you invest INR. 500-1000 each month, you can take advantage of compounding. This process provides even better returns and growth.
For example:
Let us say, you started an SIP of INR. 5,000 per month at an average return of 12% per annum. By the end of the year, your invested amount will be 5000 x 12= INR.
60,000, and the profit earned will be INR. 7,200.
Now each year, you keep reinvesting the profit on investment. This is how your returns will look over the years.
In 25 years, a SIP of 5000/month with a 12% compounding return can turn your INR. 15,00,000 into INR. 79,80,000.
Note: This is an example. The actual scenario might vary with market changes.
Now let us say, Rhea, Rohan, and Sakshi are three friends who started a SIP of INR.
5,000 with 12% compounding interest till age 60. Rhea started investing at age 25, Rohan at 30, and Sakshi at 35.
By the time Rhea, Rohan and Sakshi turned 60 years old, Rhea had built more wealth than Rohan and Sakshi.
Notice how Rhea only invested INR. 3,00,000 more than Rohan and INR. 6,00,000 more than Sakshi in over 10-15 years but her total corpus grew INR.
1.5 crores more than Rohan’s corpus and INR. 2.2 crores more than Sakshi’s corpus. That’s the benefit of starting early and the true power of compounding.
Tip – If you start early, the power of compounding can turn your lakhs into crores in the long term.
Key Takeaway
With SIPs, it is certainly possible to create a large corpus over the years. In fact, it’s one of the best ways to achieve your financial goals. You can invest in various types of equity mutual funds to diversify your portfolio.
Whether you are just starting your career or nearing retirement, SIPs are one of the safest investment options. You can explore the stock market and other asset classes, but always keep a couple of SIPs in your portfolio.
Now that you know why SIPs are so important, take a pen and paper and choose the right mutual funds. Or simply call VNN Wealth experts to help you build a solid portfolio.
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