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At the time of choosing an appropriate strategy for making Mutual Fund investments, every investor is faced with a key dilemma – whether to invest via the lumpsum route or to invest via a systematic investment plan (SIP). While both of these mutual fund investment strategies have their pros and cons, the benefits of SIP investments for a novice investor cannot be overstressed. In the following sections we will discuss 6 key benefits of SIP and a few factors you should keep in mind when making mutual fund investments systematically.
The Benefits of SIP
Systematic Investment Plan (SIP) in mutual funds allow investors to invest a fixed sum of money periodically in mutual funds. The most common type of SIP is the monthly SIP where on a specific date of the month, a pre-defined sum of money is invested in the Mutual Fund of your choice. Also do keep in mind that while the SIP amount is fixed, the NAV (Net Asset Value) of mutual fund units varies on a daily basis, you with SIP transaction, you will end up purchasing different number of units. This feature is what provides the various benefits of SIP that we will discuss next.
1. Rupee Cost Averaging
Rupee cost averaging is a concept wherein you purchase a higher number of units when the Net Asset Value of a fund is low and a lesser number of units when NAV is high. Essentially this benefit of SIP ensures that the cost of purchasing mutual fund units averages out over the tenure of the tenure of the SIP. You do not have to worry about how to time the market if you are investing through SIP and this is one of the key benefits of SIP investments.
2. Power of Compounding
Compounding happens when the returns on the investments you made start earning returns. This is a simple concept, but its practical applications are substantial. With regular investments through SIPs, your returns can also get reinvested. With the passage of time, this results into a snowball effect, which increases the potential returns multiple times. An ideal way to maximize the gain is to invest for an extended period. This is also one of the benefits of SIP, wherein you can benefit by investing as early as possible.
3. Flexible Investment Amount
One of the key benefits of SIP over lump sum investment is that you can choose to invest in mutual funds through SIP, with just Rs 500 every month. This is an affordable way to invest monthly, without hurting your wallet. You can also increase the number of monthly investments with a rise in your earnings via the Systematic Investment Plan step-up feature. Additionally, there is no limit to the number of SIP or mutual funds you can invest in at the same time. This is how the SIP investment strategy can help reach investment goals faster.
4. Convenient Investment Method
Another advantage of SIP is that it is a convenient way of investing. Even if you may not be able to find time for extensive market research and analysis to time markets, SIP investments will happen automatically. So, once you choose a good fund, you can just give standing instructions to the bank and the monthly SIP will be deducted automatically so that your never miss out on an investment opportunity.
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5. Disciplined Savings
Systematic Investment Plans involve regular usually monthly investments being made into a mutual fund of your choice. On the one hand, this ensures that you develop a habit of saving money, on the other hand, you are better placed to make your money grow over time by staying invested in a market-linked investments that has the potential to beat inflation. While other investments like recurring deposit can also help inculcate a habit of saving, the potential of mutual funds to generate inflation-beating returns are an advantage that is not available with many other investments.
6. Flexible Investment Tenure
Another benefit of SIP is the flexibility you have with respect to investment tenure. Some mutual funds might need you to make a minimum investment of 6 SIP installments. However, there is no limit on how long you can continue making systematic investments into a fund.
5. Disciplined Savings
Systematic Investment Plans involve regular usually monthly investments being made into a mutual fund of your choice. On the one hand, this ensures that you develop a habit of saving money, on the other hand, you are better placed to make your money grow over time by staying invested in a market-linked investments that has the potential to beat inflation. While other investments like recurring deposit can also help inculcate a habit of saving, the potential of mutual funds to generate inflation-beating returns are an advantage that is not available with many other investments.
6. Flexible Investment Tenure
Another benefit of SIP is the flexibility you have with respect to investment tenure. Some mutual funds might need you to make a minimum investment of 6 SIP installments. However, there is no limit on how long you can continue making systematic investments into a fund.
This flexibility to keep investing via SIP for as long or as short a time as possible is not available if you are making lump sum investment in mutual funds.
Tips to Invest in SIP
Now that we know the benefits of SIP in mutual funds, let us understand the way and tips to invest in SIP.
1. Complete Your KYC Appropriately
All the fund houses require investors to complete the process of KYC documentation prior to starting investing. You need to submit your photograph, address proof and identity proof. Today, an e-KYC as an option is also acceptable. You can also complete the formalities online without visiting AMC.
2. Set Your Investment Goals Well
The first step is to understand what you desire to accomplish when you choose to avail the benefits of SIP investments. A pro tip is to list down your financial goals for clarity. It is important because every mutual fund has a designated objective. Identify your goals and choose funds that can help you achieve these goals.
3. Make the Right Choice of SIP
Once you select a particular fund, make the right choice of SIP parameters to avail the best of the benefits of SIP. Fill in the details of questions like:
- The tenure of investment
- The frequency of investment
- The amount of investment
- The relevant information is based on goals and financial situation
3. Make the Right Choice of SIP
Once you select a particular fund, make the right choice of SIP parameters to avail the best of the benefits of SIP. Fill in the details of questions like:
- The tenure of investment
- The frequency of investment
- The amount of investment
- The relevant information is based on goals and financial situation
4. Invest Wisely
When the research is complete, and you are ready to make an informed decision, you can start investing in your preferred mutual fund via SIP. This way you can grow your wealth and generate passive income for later on in life.
FAQs
1. Why choose a Systematic Investment Plan?
A SIP is a cost-effective and simple way to invest money in mutual funds. There are several benefits of SIP, and it can be a good option if you wish to minimize the level of risk and invest in mutual funds on a regular basis.
2. What is the best time for SIP investments?
There is no best time for SIP investment. One of the biggest benefits of SIP investment is that there is no requirement to time the market or wait for the right time and opportunity to invest. Once you choose a particular fund to invest in, you can choose any date of a particular month and invest on a regular basis. As one of the advantages of SIP, you can also choose to automate investments and make the entire process easy.
3. Is SIP a good investment option for long-term financial goals?
Investing through SIPs for long-term goals is an effective way to grow your wealth. This is because compounding is one of the benefits of SIP. So, the longer you stay invested, the more your investment grows through the power of compounding.
4. How much can I invest in a mutual fund through SIP?
A majority of fund houses allow investors to make SIP investments, starting at only Rs. 500 per month. There are no upper limits, and you can invest any amount you like.
5. What happens if I miss a SIP payment?
You can miss out on your SIP payments, and even if you do, the account will not be deactivated. It is another one of the benefits of SIP if you are unable to make monthly SIP payments.
6. Are all types of investments eligible for SIP tax benefits?
No. You can only avail tax benefits for SIP investments made into ELSS (Equity Linked Saving Schemes). Each year you can avail tax benefits of up to Rs 1.5 Lakhs under Section 80C of the Income Tax Act by making SIP investments in ELSS tax saver funds.
Sources:
https://www.sbimf.com/en-us/sip
https://timesofindia.indiatimes.com/business/faqs/mutual-fund-faqs/what-are-the-benefits-of-sip/articleshow/62983266.cms
https://www.etmoney.com/mf/what-is-sip
https://www.hdfcbank.com/personal/resources/learning-centre/invest/what-is-sip-and-how-to-invest-in-sip
https://www.icicidirect.com/mutual-funds/products/sip
https://www.miraeassetmf.co.in/knowledge-center/what-is-sip
ARN No : Sept22/Bg/08