Why should you consider investing in SIP?

Sudhendra Lakshmana Rao 5 Feb 2022


Saving a small portion of our monthly earnings can be tough for most of us because we don't consider the future or any unpredictable circumstances. While it's important to live in the moment, it's also a good idea to think about saving for the future. Many of us make the decision to start saving for the next month but then forget about it.

Systematic Investment Plan (SIP) could potentially be a boon to anyone willing to save a small amount each month. Letting all your money rot in your savings bank account for a small interest rate is old school now. Investing in SIPs in small amounts each month could result in significant savings in the long run.

SIPs, however, are not for those looking to double their investment in a short period of time. SIPs can prove to be a very profitable investment only if you invest some patience and time along with your money. Mutual Fund investments could be your first step in learning about the stock market and equity markets.

But before we dive into the benefits of investing in SIPs, let’s learn what they are.

What is SIP?

Systematic Investment Plan (SIP) is a form of investment offered by mutual funds that allow you to invest a fixed sum at periodic intervals, say monthly or once every other quarter. The sum you decide to invest in can be as low as INR 500, and just like a recurring deposit, the sum is debited from your bank periodically on your instructions.

SIPs have become increasingly popular over the years as they allow you to partake in the market while better controlling your risks. The reason behind its popularity is that anyone can confidently invest in small amounts without worrying about the volatility or the timing of the market.

The Perks of SIP Investments

1. Power of Compounding

The power of compounding refers to the interest you gain on your accumulated interest. This concept, as simple as it may appear, has a variety of practical implications. As a result, when you start investing in SIPs on a regular basis, the interest you receive is reinvested. As a result, your re-invested interest begins to earn interest from that point on.

What we must understand is that we can only increase our profits if we invest for a longer duration. As a result, the sooner you begin investing, the better.Now, let’s assume that you want to invest INR 1000 every month in a mutual fund with an expected rate of return of 14%. You might be thinking of starting small investing for a couple of years, but see the table below to see why it’s important to invest for a longer time to get maximum gains.

[INR 1000 per month @14%]
Tenure Invested Amount Estimated Gain Final Amount
5 Years 60000 27201 87201
10 Years 12000 142091 262091
20 Years 240000 1316346 87201
30 Years 360000 5197056 5557056

In the above table, you can clearly observe the exponential nature of SIP returns. As a result, those who begin investing in their early stages of life benefit more than those who begin investing later in life.

2. Convenience

The best thing about SIP is that it is very convenient. The process of investing in mutual funds is hassle-free and easy. The first step is to pick a good mutual fund to invest in. Then, you direct your bank to deduct the amount from your account on a recurring basis. That's all there is to it. You don't have to go to the bank to pay your installments. It is done for you by technology.

Another advantage of investing in mutual funds is that you do not need to know extensively about the markets. While it’s an added bonus if you have a basic knowledge of the equity and stock markets, those who don’t need not step back from investing. There is no need for extensive research and analysis of the market in order to invest in Mutal Funds.

3. Low Intial Investment

With as little as INR 500, one can start investing in mutual funds. No, you don’t need to be earning big numbers to be able to invest. Anybody who can keep aside a small portion of their earnings each month can start investing in mutual funds. This can be a great source of investment without being a burden on your monthly expenses.

While you can start investing for as little as INR 500, it’s not necessary that you move ahead with the same amount until the fund matures. When you feel comfortable investing more in mutual funds, you can always raise your investment with the SIP step-up feature. Mutual fund houses regularly allow their investors to increase their investment amounts. With this feature, you can start with a small amount at the beginning and later increase your investment amount as and when it’s financially feasible for you. This can be a great approach to increase the pace of reaching your investment goals.

4.Rupee Cost Averaging

Rupee cost averaging is a unique feature in SIPs that can reduce the cost of investment and result in significant gains at the same time. This feature assists an investor in avoiding market fluctuations and makes his or her investment less susceptible to market volatility. This is a method in which you buy more units when the fund's net asset value (NAV) is low and fewer units when the NAV is high.

In Conclusion

Towards the end, we can all agree that SIPs can be a great start to your investment journey. The investment is feasible for all since the money required for investment is very small. If all of these benefits weren't enough, it also teaches you how to properly manage your finances by saving on a regular basis. There are enough reasons for you to start investing today!

Now if you’ve made up your mind to invest in Mutual Funds, get in in touch with us to find the fund that best suits your growth.

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