An SIP (systematic investment plan) is a popular and reliable investment route when it is about mutual fund investment. This is because of its potential to gather sufficient investment corpus through fixed small investments in a preferred mutual fund over a long time period irrespective of the market movements. Discussed here are some of the important SIP benefits you must be well-versed with before investing in mutual funds through the SIP route.
- Eliminates the requirement to time your investments
It is important for you to have a good understanding of the macro-economic situations, fundamental analysis, geopolitical trends, technical analysis, policy impacts, etc., to time your investments in the market. In case you are a beginner, tracking the market levels might be difficult for you. In such a scenario, it is advised for you to invest in mutual funds via SIP as this route ensures regular and automatic investments, which saves you from the complication of timing your investments in mutual funds depending on market ups and downs. Also, choosing the SIP mode allows you to average out your mutual fund investment cost by purchasing higher units during a bearish market phase.
- Allows disciplined and regular investing habits
In the SIP route, you must commit to a particular amount as an investment at a predetermined date from your savings account to your selected mutual fund scheme. Such automatic debits allow periodic and disciplined investment and save you from the stress of being influenced by the market emotions of greed and fear.
- Activates the feature of rupee cost averaging
As the investment amount through the SIP mode remains the same in each instalment, the units bought vary based on the market movements. Higher units are purchased during bearish market phases and lower units are purchased during rising market phases. It helps in automatically averaging out the investment expense. Note that you must consider SIP investments to meet your long-term goals as this permits you to exploit phases of market corrections by buying higher units at reduced NAV (net asset value).
Permits investment of a smaller amount –
Initial lump sum investment in equity funds generally starts from Rs 5,000 and minimum top-up investment begins from Rs 1,000. However, in the case of SIP mutual fund investment, the minimum investment starts from as low as Rs 100. Thus, with an SIP, you can start your investment in a mutual fund with a small investible with no need to wait for creating a higher investment amount.
- Allows to grow wealth through compounding
Compounding refers to a concept where your earned interest on your investment is reinvested along with your initial capital to generate higher returns. As you can begin your investment through an SIP in a mutual fund with a small investible amount, this permits you to start investing in a fund at a very early stage to get the most out of compounding effect. A small monthly SIP investment of Rs 1,500 per month in equity fund at an annualised return rate of 12% per annum for a time period of 30 years can yield an overall corpus equaling Rs 52.42 lakh.
Ending note
An SIP is an excellent mode to meet your long-term financial goals through systematic and small investments in a suitable mutual fund as per your risk appetite and investment horizon. The benefits of the rupee cost averaging and compounding effect play a major role in generating higher returns in SIPs over the long term. However, before you opt for the SIP mode, ensure to use an online SIP calculator to compute the monthly investment you must invest to attain the financial goal within the desired time frame.
